REVIEWER Managerial Economics (ME)

MODULE 6
“The Theory and Estimation of Production”

• The Production Function

• Production in the Short Run
• Total, Average, and Marginal Product
• Law of Diminishing Returns
• Stages of Production
• Optimal Input Usage
• Production in the Long Run
• Returns to Scale

Production Function
A production function defines the relationship between inputs and the maximum amount that can be produced within a
given time period with a given technology
 Mathematically, the production function can be expressed as
Q=f(X1,X2,...,Xk)
Q is the level of output
X1,X2,...,Xk are the levels of the inputs in the production process
f( ) represents the production technology
 For simplicity we will often consider a production function of two inputs:
Q=f(X,Y)
Q is output
X is Labor
Y is Capital

When discussing production, it is important to distinguish between two time frames.

 The short-run production function describes the maximum quantity of good or service that can be
produced by a set of inputs, assuming that at least one of the inputs is fixed at some level.
 The long-run production function describes the maximum quantity of good or service that can be
produced by a set of inputs, assuming that the firm is free to adjust the level of all inputs.
 When discussing production in the short run, three definitions are important.
 Total product (TP) is another name for output in the short run. The total product function is the
same as the short run production function
 The marginal product (MP) of a variable input is the change in output (or TP) resulting from a
one unit change in the input. MP tells us how output changes as we change the level of the input
by one unit.
 The average product (AP) of an input is the total product divided by the level of the input. AP
tells us, on average, how many units of output are produced per unit of input used.
 Consider the two input production function Q=f(X,Y) in which input X is variable and input Y is fixed at
some level.
 The marginal product of input X is defined as holding input Y constant.
 The average product of input X is defined as holding input Y constant
Q
APX 
X

___________1. Define the relationship between inputs and the maximum amount that can be produced within a
given time period with a given technology
___________2. Describe the maximum quantity of good or service that can be produced by a set of inputs, assuming
that at least one of the inputs is fixed at some level.
___________3. Is another name for output in the short run.
___________4. Describe the maximum quantity of good or service that can be produced by a set of inputs, assuming
that the firm is free to adjust the level of all inputs.
___________5. Is the total product divided by the level of the input.

MODULE 7
“The Law of Diminishing Returns”

The Law of Diminishing Returns

The law of diminishing marginal returns is a theory in economics that predicts that after some optimal level of
capacity is reached adding an additional factor of production will actually result in smaller increases in output. .The law
of diminishing returns is related to the concept of diminishing marginal utility.
You might have heard of the proverb: ‘Too many cooks spoil the broth’. The law of diminishing returns discusses this
in the context of production. What happens when we keep on adding inputs and exceed the quantity required for
optimum production?

Why is the law of diminishing returns important?

The law of diminishing marginal returns is one of the fundamental principles of economics, and it is important for
finding the right balance in production within an organization. ... Finding the right balance between factors of production
is essential, but it takes knowledge and effort.

A Farmer Example of Diminishing Returns

He is still deciding on how much fertilizer to use. As he increases the amount of fertilizer, the output of corn will
increase. It may also reach a point where the output actually begins to decrease since too much fertilizer can become
poisonous.

The Law of Variable Proportions

The law of variable proportions is a new name for the law of diminishing returns, a concept of classical economics.
But before getting on with the law, there is a need to understand the total product (TP), marginal product (MP) and
average product (AP).
 Total Product: Total product is the total output obtained from the combined efforts of all the factors of
production. Further, if we wish to find the effect of one factor of production, say labor, on the total product, we
need to keep all the other factors constant. In this case, the total product would vary with the factor kept
variable.
 Marginal Product: The change in the total product when one more unit is added to the variable factor is known
as the marginal product.
 Average Product: Average product is the total product per unit of the variable factor. In other words, it is the
ratio of total product to the quantity of variable factor.

The Relationship between Average Product and Marginal Product

 When there is a rise in the average product due to an increase in the quantity of the variable input, the marginal
product is more than the average product.
 The maximum average product is equal to the marginal product. Simply put, the maximum point of the average
product curve is also a point on the marginal product curve, a point where both of these curves intersect.
 When the average product falls, the marginal product is less than the average product.

The Law of Diminishing Returns

The law of diminishing returns operates in the short run when we can’t change all the factors of production. Further,
it studies the change in output by varying the quantity of one input.
Technically, the law states that as we increase the quantity of one input which is combined with other fixed inputs,
the marginal physical productivity of the variable input must eventually decline.
 In simpler words, the total productivity, for a given state of technology, is bound to increase with an increase in the
quantity of a variable input. However, as the quantity of the inputs keeps on increasing, the marginal product rises to a
maximum, then starts to decline and eventually becomes negative
This is because the crowding of inputs eventually leads to a negative impact on the output. Lastly, The law of
diminishing returns also comes with some assumptions:
We assume the state of technology to be constant. A variable state of technology would impact the marginal and
average product. In that case, we would not be able to accurately study the relationship between output and the fixed
input.
Only one input should be variable keeping other inputs constant. This law does not apply to cases when all the
inputs vary proportionately. In that case, the returns to scale comes to the rescue
The law does not apply to a production scenario where we require specifically fixed proportions of inputs. In such a
case, an increase in any input would not have any impact on production, since the marginal product will be equal to
zero. We consider only physical inputs and outputs and not economic profitability in monetary terms.

We can divide the behavior of output when varying one input, keeping other inputs fixed in the short run, into three
stages.
Stage I: Increasing Returns
We characterize this stage with the total output increasing at an increasing rate with each additional unit of the
variable input. This continues to point A on the TP curve. Further, the MP curve rises to the point X corresponding to the
point B on the TP curve, also known as the point of inflexion.
After point B, the TP curve continues to rise but now at a decreasing rate. The MP also starts to fall but is positive.
The end of this stage sees the maximum point of the average product, where the AP and MP curves intersect.
We get increasing returns in the first stage because initially, the fixed factors are abundant relative to the variable
factor. The introduction of additional units of the variable factor leads to the effective utilization of the fixed factors.
Evidently, production increases at an increasing rate.
For example, if a machine requires four workers for its optimum utilization, and in the current scenario is two
workers are operating the machine, the factor would be underutilized. Addition of another worker would definitely lead
to an increase in the output. Further addition of a worker would lead to optimum utilization and hence production
would increase.
Now we cannot divide the fixed factor (here the machine) to suit the availability of the variable factor (here the
workers) because generally the fixed factors are indivisible. Indivisibility of a fixed factor means that due to technological
requirements, a minimum amount of the factor must be employed whatever the level of output.
Another reason for rising returns is the increase in the efficiency of the variable factor itself. This is because, with a
sufficient quantity of variable factor, the introduction of specialization and division of labor becomes possible which
leads to higher productivity.

Stage II: Diminishing Returns

Throughout the stage of diminishing returns, the total product keeps on increasing. However, unlike the stage of
increasing returns, here the total product increases at a diminishing rate. This happens because the marginal product
falls and becomes less than the average product, which also sees a downwards slope.
Thus, this stage is known as the stage of diminishing returns. The end of this stage is marked by the total product
attaining its maximum value and the marginal product becoming zero. Further, this stage is very important because the
firm will seek to produce in its range.
After the addition of a certain amount of variable inputs which lead to the optimum and efficient utilization of fixed
input, the output starts diminishing. This is because any further addition to the variable factor after the point of efficient
utilization renders the fixed factor inadequate relative to variable factor. Again, this is the reason why the marginal and
average product decline at this stage.
In other words, the contribution of extra variable inputs is actually nil. This further means that the fixed indivisible
factor is being worked too hard. Another reason for the law of diminishing returns is the lack of availability of a perfect
substitute.
In case of the availability of a perfect substitute, an increase in its quantity would have made up for the scarcity of
the fixed factor. This, in turn, would have prevented the ineffective utilization.
Stage III: Negative Returns
The origin of stage 3 starts from the maximum point of the TP curve. In this stage, the TP curve now starts to decline.
Moreover, the MP curve becomes negative coupled with a fall in the AP curve.
The excessive addition of variable inputs leads to negative returns at this stage. This is because of the crowding of
the variable factors. The variable and fixed factors now start getting into each other’s ways. Effectively, there is no
coordination and hence the output falls.

Stage of Operation
A major dilemma in the world of the law of diminishing returns is deciding the stage where a rational producer
would look to operate. Let’s examine each of these stages from his perspective.
The stage of negative returns or stage III is probably not a stage of the producer’s choice. This is because the fixed
factors here are over utilized. Thus a rational producer would know that he is not having optimum production.
Further, production can be increased by decreasing the number of variable inputs. Effectively, even if the inputs are
free of cost, the producer would stop before the advent of stage III.
Stage I or the stage of increasing returns is a better stage, to start with. However, a rational producer would again
not operate in this stage. This is because he would know that he is not making efficient utilization of the fixed inputs. In
simpler words, the fixed inputs are underutilized.
Furthermore, the producer would have an opportunity to increase production by employing more variable inputs
and hence firing production on all engines. Eventually, even if the fixed factor is free of cost in this stage, a rational
producer would continue adding more units of the variable factor.
So now we understand that both stage I and stage III are not viable stages of production. Evidently, they are also
known as the stages of economic absurdity or economic non-sense.
This brings us to the conclusion that a rational producer would operate in the second stage of production, where
both average and marginal products tend to decline. At which particular point in this stage, the producer decides to
produce depends upon the prices of the factors.

__________1.is a new name for the law of diminishing returns, a concept of classical economics
__________2.is a theory in economics that predicts that after some optimal level of capacity is reached adding an
additional factor of production will actually result in smaller increases in output
__________ 3.The change in the total product when one more unit is added to the variable factor
__________ 4.is the total product per unit of the variable factor
__________ 5.is the total output obtained from the combined efforts of all the factors of production

MODULE 8
“Corporate Planning and Managerial Economics”

Corporate planning is creating a strategy for meeting business goals and improving your business. A corporate plan is a
roadmap that lays out your business’s plan of action. It is imperative to write down goals and plan for how they will be
achieved. Without planning, business operations can be haphazard, and employees are rarely on the same page. When
you focus on corporate planning, you set achievable goals and bring your business one step closer to success.

Vision statement: You company’s vision statement broadly defines what goals you are working to achieve. This
statement is where you hone in on your business’s focus and what you want to accomplish over the next three-to-five
years. Think big, but remember that you will have to create a strategic plan to back these goals up. So always make sure
that your goals can be defined as SMART goals (strategic, measurable, achievable, realistic and time-based).

Mission statement: A good mission statement lays out how you will achieve your vision statement in a few sentences. It
should illustrate what you plan to offer or sell, the market you are in, and what makes your company unique. A mission
statement is like an elevator pitch for your entire strategy. It effectively communicates who you are and what you want
to do in a few lines.

Resources and scope: Part of corporate planning is taking stock of everything you currently have going on in your
organization. You'll look at your systems, products, employees, assets, programs, divisions, accounting, finance and
anything else that’s critical to meeting your vision. This part is almost like making a map of your current organization. It
gives you a bird’s eye view of everything your company has going on, which helps you create a plan for moving towards
the future.

Objectives: Next, you need to lay out your business objectives and how you plan to measure success. This is a good time
to hone in on that SMART planning to ensure that your objectives are strategic, measurable, achievable, realistic and
time-based. A vague goal such as “improve brand reputation” is meaningless without a solid measure of success in
place. A SMART goal would instead be “improve brand reputation by placing the product in five positive media stories by
the end of Q1.”

Strategies: Now, it’s time to illustrate the strategies you plan to use to meet the objectives of your company. These
strategies could be anything from introducing new products to reducing labour costs by 25 %, depending on the goal.
Your strategies should directly address the objectives you have laid out in your corporate plan, and include a plan of
action for how you will implement them. These are the nitty-gritty plan details.

The following are a few examples of corporate planning objectives:

Financial objectives: Presumably, you went into business to make money. Your corporate planning financial objectives
are your money-oriented goals. These objectives can include growing shareholder value, increasing profits and
generating more revenue, to name a few. However, not all financial objectives are about revenue and profits. There are
also objectives on cutting costs, balancing budgets, maintaining proper budget ratios and more. Another financial
objective example might be diversifying or creating new revenue streams. Your specific goals will depend on your
company’s individual needs, but most corporate plans include at least a few financial objectives.

Customer objectives: Your customer objectives centre on what you plan to do for your customers. A customer-centred
objective could be giving your consumers the best value for the price they pay. Or, you could aim to improve product
reliability. Another customer objective is increasing your market share or offering the best possible customer service.
These objectives will vary, but they all centre around meeting customer demand.

Internal objectives: It’s important to consider internal objectives when doing corporate planning. Internal objectives
include three areas: innovation, operations and customer service. Innovation objectives might consist of improving a
product or growing the percentage of sales of a particular product. Another innovation objective might be to invest x
dollars in the innovation of products. Operations objectives focus on reducing waste, investing in quality, improving
workplace safety and reducing errors in manufacturing, to name a few. Another potential operations objective is
streamlining. Finally, customer service objectives centre on improving customer service, retention and satisfaction.

Learning and growth objectives: Every organization needs learning and growth objectives when corporate planning.
Learning and growth objectives are those that involve employees, your company culture and your business’s
organizational capacity. One possible example of a learning and growth objective is boosting company culture,
increasing employee retention and improving productivity.

Why You Need Corporate Planning

Every business needs to do corporate planning. Creating a strategic plan gives your company direction and
actionable goals to see through. Without a plan, how will you know your priorities or where to place your resources? A
business with a plan achieves better results than one that does not have any direction.
The first reason you need corporate planning is because it provides clear objectives for your organization. You
wouldn’t leave for a road trip without mapping out your route. Similarly, it’s not advisable to run a business without
mapping out your route. Corporate planning puts on paper your focus, and allows you to move forward with purpose. If
your business is operating without a plan, you will not be able to achieve your goals. Goals must be written down and
broken into parts to be efficiently achieved. Further, they must have clear timelines and deliverables. Corporate
planning helps you create a roadmap for success by asking you to answer three crucial questions:
 What is the purpose of this business? (Mission)
 Where do we want to go and what do we hope to achieve? (Vision)
 How will we achieve our objectives? (Plan)
 Another reason you need corporate planning is because it can help align your organization and its values. A
corporate plan does more than simply keep your employees on a timeline for success. It also defines who you are as a
company, and what you stand for. Likewise, when employees get a say in the direction of a business and its objectives,
your company culture will improve. Planning for the future brings everyone to the table, promotes the exchange of
ideas and creates effective solutions to organizational problems. Making and sticking to a plan ensures that everyone in
the organization is on the same page. Small business owners especially will find that strategic planning is a great way to
get feedback from employees and improve overall culture.
Finally, a corporate plan helps communicate your brand’s message to employees, shareholders, creditors, partners,
investors and customers. Taking the time to hone your vision and mission statements is extremely important for
messaging, which is essentially communicating what you are and what you want to be as a company. When your
purpose as a company is boiled down to its bare bones and made widely available, the message sticks. Everyone
immediately knows what your brand stands for and who it hopes to serve. A solid, clear corporate plan can be used to
attract investors, customers and employees.

How to Do Corporate Planning

There are no hard-and-fast rules for how to do corporate planning. Each company has unique needs when it comes
to planning for the future. However, there are a few tips to keep in mind for corporate planning success. First, gather
input from employees from all different divisions of the company to go into the plan. You can do this through an open
forum or employee meetings.
Next, a crucially important step is to bring the right people together to write the plan. Even if you involve many
people in the brainstorming process, only a few should be involved in the actual writing process. Wording can become
arduous when too many people are involved. For the first draft of the plan, it’s important not to obsess over every word.
That will come later as you revise drafts and bring in more players, such as your board members. At first, only concern
yourself with getting the main ideas and objectives written down.
After writing your first draft, show your employees, the board of directors and senior management as soon as
possible. They will all have valuable insight and feedback as to how you should move forward. Ultimately, your
corporate planning draft should include:
 Executive summary: This is the quick version of what your corporate plan includes. An executive summary
should concisely cover your brand values, mission, vision, objectives and key strategies.
 Signature page: This page will include board member signatures, stating that they agree with and are committed
to your goals and vision.
 Company description: Include your company’s biography, including its history, products and any significant
achievements.
 Mission, vision and value statements: These statements outline who your company is, what you do and where
you plan to go in the future. This is where you communicate your most important priorities.
 Strategic analysis of your company: This is the section that covers a SWOT analysis (strengths, weaknesses,
opportunities, threats) of your company and its divisions. The strategic analysis also lays out issues you plan to
address in the coming months and years.
 Strategies and tactics: In this section, lay out your strategies and how exactly you plan to accomplish them.
 Action plan: Your action plan lays out the responsibilities you plan to take on, as well as a timeline for
accomplishing them.
 Budget and operations plans: Of course, to accomplish your company’s goals, you will need to have money in
the budget. Lay out the financials and your specific plan for operations.
 Monitoring and evaluation: How do you plan to evaluate if your goals are being met? This section illustrates
how you will measure progress for your objectives.
 Communication of the plan: A description of how you will communicate your corporate plan to employees,
stakeholders, customers and any other important parties.

Corporate Planning and Economics

A formal, systematic managerial process, organized by responsibility, time, information, to ensure the operational
planning, project planning, and strategic planning are carried out regularly to enable top management to direct and
control the future of the enterprise”
Three phases of Corporate Planning:
 Operational Planning Is simply the forward planning of existing operations in existing markets in existing
customers and facilities.
 Project Planning - Also called development planning or capital expenditure planning – is the generation and
appraisal of the commitment to and the working out of the detailed execution of an action outside the scope of
present operations, which is capable to separate analysis and control.
 Strategic Planning- Is the determination of the future posture of the business with special reference to its
product – market posture, its profitability, its size, its innovation, and its relationships to executives, its
employees, and certain external institution.
 Basic concept about planning The point of view in this is that planning is a process of preparing for the
commitment of resources in the most economical fashion and, by preparing for it, of allowing this commitment
to be made faster and with less hitches.

___________1.is simply the forward planning of existing operations in existing markets in existing customers and
facilities
___________2.Is the determination of the future posture of the business with special reference to its product – market
posture, its profitability, its size, its innovation, and its relationships to executives, its employees, and certain external
institution
___________3.is a roadmap that lays out your business’s plan of action, It is imperative to write down goals and plan for
how they will be achieved
___________4.Also called development planning or capital expenditure planning – is the generation and appraisal of the
commitment to and the working out of the detailed execution of an action outside the scope of present operations,
which is capable to separate analysis and control
___________5.statement broadly defines what goals you are working to achieve

MODULE 9
“The Social Responsibility of Business”

Social responsibility of business refers to its obligation to take those decisions and perform those actions which are
desirable in terms of the objectives and value of our society.
Social responsibility of business implies the obligations of the management of a business enterprise to protect the
interests of the society.
According to the concept of social responsibility the objective of managers for taking business decisions is not
merely to maximize profits or sharehold­ers’ value but also to serve and protect the interests of other members of a
society such as workers, consumers and the community as a whole.
It may be noted that some Indian sociologists and economists relate the idea of social responsibility of business of
the Gandhian concept of trusteeship. According to Mahatma Gandhi, capitalist class owns wealth or capital as trustees
of the society. The resources and capital they use for production of goods and services, according to him, should be used
not to maximize profits for them but for the larger benefit of the society.
However, in our view, it will be too idealistic to expect that business enterprises will be purely guided by the benefits
they confer on the society by their activities. The concept of social responsibility as used in management science is that
businesses should maximise their profits subject to their working in a socially responsible manner to promote the
interests of the society.
Their business activities should not harm other groups such as consumers, workers, and public at large. Mr. N.R.
Narayana, Chairman of Infosys makes the idea of social responsibility of business quite clear when in a conference on
corporate social responsibility he said, “Corporate’s foremost social responsibility is to create maximum shareholders’
value working in a way which is fair to all its stakeholders — workers, consumers, the community, government and the
environment He further points out.
Working in harmony with the community and environment around us and not cheating our customers and workers
we might not gain anything in the short run but in the long term it means greater profits and shareholders’ value’

Social Responsibility of Business and Social Contract:

 It is evident from above, the social responsibility of business implies that a corporate enterprise has to serve
interests other than that of common shareholders who, of course, expect that their rate of return, value or wealth
should be maximised.
But in today’s world the interest of other stakehold-ers, community and environment must be protected and
promoted. Social responsibility of business enterprises to the various stakeholders and society in general is considered
to be the result of a social Fig. 3.1. Responsibility of Business Enterprises towards Stakeholders and Society in General
contract.

Responsibility of Business Enterprises towards Stakeholders and Society in General

Social contract is a set of rules that defines the agreed interrelationship between various elements of a society. The
social contract often involves a quid pro quo (i.e. something given in exchange for another). In the social contract, one
party to the contract gives something and expects a certain thing or behaviour pattern from the other.
In the present context the social contract is concerned with the relationship of a business enterprise with various
stakeholders such as shareholders, employees, consumers, government and society in general. The business enterprises
happen to have resources because society consisting of various stakeholders has given them this right and therefore it
expects from them to use them to for serving the interests of all of them.
Though all stakehold-ers including the society in general are affected by the business activities of a corporate
enterprise, managers may not acknowledge responsibility to them. Social responsibility of business implies that
corporate managers must promote the interests of all stakeholders not merely of shareholders who happen to be the so
called owners of the business enterprises.

1. Responsibility to Shareholders:
In the context of good corporate governance, a corporate enterprise must recognise the rights of shareholders and
protect their interests. It should respect shareholders’ right to information and respect their right to submit proposals to
vote and to ask questions at the annual general body meeting.
The corporate enterprise should observe the best code of conduct in its dealings with the shareholders. However,
the corporate Board and management try to increase profits or shareholders’ value but in pursuing this objective, they
should protect the interests of employees, consumers and other stakeholders. Its special responsibility is that in its
efforts to increase profits or shareholders’ value it should not pollute the environment.

2. Responsibility to Employees:
The success of a business enterprise depends to a large extent on the morale of its employees. Employees make
valuable contribution to the activities of a business organisation. The corporate enterprise should have good and fair
employment practices and industrial relations to enhance its productivity. It must recognise the rights of workers or
employees to freedom of association and free collective bargaining. Besides, it should not discriminate between various
employees.
The most important responsibility of a corporate enterprise towards employees is the payment of fair wages to
them and provides healthy and good working conditions. The business enterprises should recognise the need for
providing essential labour welfare activities to their employees especially they should take care of women workers.
Besides, the enterprises should make arrange-ments for proper training and education of the workers to enhance their
skills.
However, it may be noted that very few companies in India follow many of the above good practices. While the
captains of Indian industries generally complain about low productivity of their employees, little has been done to
address their problems. Ajith Nivard Cabraal rightly writes, “It should perhaps be realised that corporations can only be
as effective and efficient as its employees and therefore steps should be taken to implement such reforms in a pro-
active manner, rather than merely attempting to comply with many labour laws that prevail in the country. This is
probably one area where good governance practices could make a significant impact on the country’s business
environment.”

3. Responsibility to Consumers:
Some economists think that consumer is a king who directs the business enterprises to produce goods and services
to satisfy his wants. However, in the modern times this may not be strictly true but the companies must acknowledge
their responsibilities to protect their interests in undertaking their productive activities
 Invoking the notion of social contract, the management expert Peter Drucker observes, “The customer is the
foundation of a business and keeps it in existence. He alone gives employment. To meet the wants and needs of a
consumer, the society entrusts wealth-producing resources to the business enterprise”. In view of above, the business
enterprises should recognize the rights of consumers and under-stand their needs and wants and produce goods or
services accordingly.

The following responsibilities of business enterprises to consumers are worth mentioning:

1. They should supply goods or services to the consumers at reasonable prices and do not try to exploit them by
forming cartels. This is more relevant in case of business enterprises producing essential goods such as life-
saving drugs, vegetable oil and essential’ services such as electricity supply and telephone services.
2. They should not supply to the consumers’ shoddy and unsafe products which may do harm to them.
3. They should provide the consumers the required after-sales services.
4. They should not misinform the consumers through inappropriate and misleading advertise-ments.
5. They should make arrangements for proper distribution system of their products so as to ensure that black-
marketing and profiteering by traders do not occur.
6. They should acknowledge the rights of consumers to be heard and take necessary measures to redress their
genuine grievances.
Despite the above responsibilities which are generally regarded as good marketing practices by management
experts the business enterprises in India generally do not pay heed to them and as a result consumers are dissatisfied or
disappointed in a large number of cases. There has been a growing awareness of consumer rights.
The organised movement to protect consumer rights which is termed as consumerism has been the result of the
negligence of business enterprises to their responsibilities to consumers. Besides, due to the indifferent attitude of
business enterprises to consumer rights, Government has been compelled to enact Consumer Protection Act to protect
consumers’ rights and to prevent their exploitation by the businesses.

4. Obligation towards the Environment:

The foremost responsibility of business enterprises is to ensure that they should not damage the environment and
for this purpose they should reduce as much as possible air and water pollution by their productive activities. They
should not dump their toxic waste products in rivers and streams to avoid their pollution. Pollution of environment
poses a great health hazard for the people and is a cause of several respiratory and skin diseases.
In economic theory pollution of environment is regarded as social cost that must be minimised. There is now a
growing awareness towards reduction in environment pollution. According to the recent findings the climate change is
occurring due to greater emission of carbon dioxide and other pollutants
Therefore, the corporate enterprises should adopt high standards of environmental protection and ensure that they
are implemented regardless of enforcement of any environment laws passed by the government. Many countries
including India have passed laws to protect the environment but they are not properly and strictly enforced.
Business enterprises in their attempt to maximise profits recklessly and negligently pollute the environment.
Therefore, it is required that government should take tough measures and enforce environment laws strictly if
environment is to be protected.

5. Responsibility to Society in General:

Business enterprises function by public consent with the basic objective of producing goods and services to meet the
needs of the society and provide employment to the people. The traditional view is that in performing this function
businesses maximise profits or shareholders’ value and doing so they do not behave in any socially irresponsible way.
According to Adam Smith whose invisible hand theorem is often quoted that while maximising their profits,
businessmen are led by an invisible hand to promote the interests of the society. To quote him, “An individual or
business generally, indeed neither intends to promote the public interest, nor knows how much he is promoting it…. He
intends only his own gains, and he is in this, as in many other cases, led by an invisible hand to promote an end which
was no part of his intention, By pursuing his own interest he frequently promotes that of the society more effectively
than when he really intends to promote it”.
In the present world where there are monopolies, oligopolies in product and factor markets and also there are
externalities, especially detrimental externalities such as environment pollution by the activities of business enterprises
maximisation of private profits does not always lead to the maximisation of social benefit.
 In fact in such imperfect market conditions, consumers are exploited by raising of prices much above the cost of
production workers are exploited as they are not paid fair wages equal to the value of their marginal product. Besides,
there are harmful external effects to which are not given due considerations by private enterprises in making their
business decisions. Therefore, there is urgent need to make business enterprises behave in a socially responsible
manner and to work for promoting social interests.
In view of the above in the context of modern developments, it is hard to agree with Milton Friedman, a winner of
Nobel Prize in economics, who called the idea of corporate social responsi­bility as a “fundamentally subversive
doctrine”. Friedman writes, “There is one and only one social responsibility of business – to use its resources and engage
in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in
open and free competition without deception or fraud”.
However, few economists and rational thinkers will subscribe to Friedman’s views like that of Adam Smith. Thus,
authors of a noted textbook on management write, “It is true that Friedman sets a rather high standard when he
suggests that businesses should operate within the ‘rules of the game’, practicing neither deception nor fraud. The rules
of the game obviously include accepted ethical practices, in addition to international, national and other laws. How
many corporations are willing to tell the absolute truth in the advertisements and to engage in open and fair
competition avoiding collusion, price fixing and so forth. The fact is that few subscribe to Friedman s hard-line views
today”.
Expressing the same sentiments, Dr. Manmohan Singh, who has been instrumental in initiating economic reforms
promoting liberalisation and privatization, in his recent speech while inaugurating the campus of Institute for Studies in
Industrial Development on May 1, 2007 said, “I was struck by a comment in the media that most of the billionaires
among India’s top business leaders operate in oligopolistic markets and in sectors where the government has conferred
special privileges on a few. This sounds like a crony capitalism……. Are we doing enough to protect consumers and small
businesses from the consequences of modern capitalism in our country” Later, on May 24, 2007, while giving inaugural
address at the Annual Session of CII he urged the captains of Indian industry to break cartels and abstain from greed in
their quest for profit maximisation.
To quote him, “The operation of cartels by groups of companies to keep prices high must end. It is unacceptable to
obstruct the forces of competition from having free play. It is even more distressing in a country where the poor are
severely affected by rising commodity prices. Cartels are a crime and go against the grain of an open economy”. More
importantly, he further adds, “Maximisation of profits should be within the bounds of decency and greed”.
The above views of Dr. Manmohan singh show that corporate businesses in India do not show any sense of social
responsibility and due to oligopolies, informal collusion and other malpractices fleece the customers by charging higher
prices in order to maximise their profits. This is clearly refutation of Friedman’s view that profit maximisation always
implies social responsibility of business.

Business enterprises have a lot of responsibility to the society at large.

We mention below some of them:
1. To take appropriate measures to reduce level of pollution and adopt eco-friendly technologies.
2. To generate sufficient employment opportunities so as to make good contribution to the reduction of poverty in
the country.
3. Respect the rights of workers and other employees and take appropriate measures to ensure their safety and to
improve their working conditions.
4. To provide quality healthcare to their employees.
5. To invest adequately in the research and development so as to make innovations to improve their productivity
6. Do not pay excessive remuneration to promoters and senior executives as it creates social resentment.
7. To end cartels that keep prices highly
8. To implement affirmative action and to provide jobs to SCs, STs and OBCs. Besides, Dr. Manmohan Singh wants
the private corporate sector to give preference to minorities, especially Muslims in providing employment.
9. To resist to pay bribes to officials and therefore do not promote corruption. He thus says, “Corruption need not
be the grease that oils wheels of progress. There are many successful companies today that have refused to
yield to this temptation. Others must follow”.

Conclusion:
 Social responsibility is related to the concept of ethics. Ethics is the discipline that deals with moral duties and
obligations. Social responsibility implies corporate enterprises should follow business ethics and work for not only to
maximise their profits or shareholders’ value but also to promote the interests of other stakeholders and the society as a
whole.

This Satyam fraud raises the question of failure of corporate governance in India, especially the role of independent
directors in ensuring good governance of the corporates. The above two examples should serve as a wake-up call for
Indian corporate businesses that they should discharge their responsibility to their customers, employees, other
stakeholders and society at large.

___________1.implies corporate enterprises should follow business ethics and work for not only to maximise their
profits or shareholders’ value but also to promote the interests of other stakeholders and the society as a whole
___________2.The success of a business enterprise depends to a large extent on the morale of its employees.
Employees make valuable contribution to the activities of a business organisation
___________3.is a set of rules that defines the agreed interrelationship between various elements of a society
___________4.In the context of good corporate governance, a corporate enterprise must recognise the rights of
shareholders and protect their interests
___________5.is the discipline that deals with moral duties and obligations

MODULE 10
“The Economics of Location”

OUR EXISTENCE in time is determined for us, but we are largely free to select our location. This is influenced, though
not dictated, by our place of origin. Finding the right location is essential to successful life, but it is essential also to a
successful enterprise, to the establishment of a lasting settlement—in short, to group survival. In addition, a suitable
location must be a location for the right events. On closer examination, these originally simple problems constantly
divide and subdivide anew. Thus presentation, unlike investigation, must begin by introducing some order into this
rapidly confusing abundance of problems. executives. Thus there is always the danger that managers will operate with
different goals in mind, so that the company lurches into the future in an uncoordinated fashion

Choice of Location for the Economic Unit

As a rule, he must find the most favorable center of a production, sales, or supply area. The first two cases concern the
location of a producer, the third that of a consumer.
1. Location for a Producer. The situation of available means of production, of competition, and of consumption
must be known as geographical data, but the significance of these factors is variable in the extreme. For the
location of a farm it is highly important that its production be areal, whereas its market may be thought of as
puncti-form…
2. Location of a Consumer. His location depends upon the location of the producers and of neighboring centers of
consumption.
This case was especially important in the Middle Ages: An inland town would develop only where the
neighboring towns left it an adequate source of agricultural supplies. The situation is fundamentally similar
today for cotton mills, flour mills, slaughter houses, and so on.

Repercussions of Individual Choices of Location

In adopting the viewpoint of the individual economic unit we appear to have freed ourselves from the general
interdependence of locations, and thus to be able to give a more exact solution than that contained in the general
equations of location to be discussed below..
1. Influence on Competitors. When the new enterprise has chosen its location competitors may re-examine theirs.
This difficult problem was first suggested by H. Hotelling,^ but treated on such simplified assumptions that his
conclusion (a tendency to agglomeration) cannot be generalized. Under uniform conditions in a free market the
individual has no latitude in the choice of his location.
2. Influence on Customers and Suppliers. We can distinguish effects on the form and the substance of their
activities.
  First, the form of consumption as a function of distance given the location of its production, the
consumption of a particular product may assume different forms, depending on the distance from the
site of its manufacture. For example, it might prove advantageous to ship a large machine already
assembled to a near-by purchaser.
 Second, the form of production as a function of distance given the place of consumption of a product,
the particular form in which it is produced may vary with the distance from that place.

Influences on the Substance of Economic Activity

 First, the object of consumption as a function of distance. Suppose competing goods are produced in the same
place. Where each will be consumed may depend on the distance from their origin.
 Second, the object of production as a function of distance. We come to the other half of Thiinen's famous
statement of the problem, the first half of which concerned the form of production as a function of distance
from the market.

Location theory, in economics and geography, theory concerned with the geographic location of economic activity;
it has become an integral part of economic geography, regional science, and spatial economics. Location theory
addresses the questions of what economic activities are located where and why. The location of economic activities can
be determined on a broad level such as a region or metropolitan area, or on a narrow one such as a zone, neighborhood,
city block, or an individual site.

Classification of Industries
Industries can be classified in a variety of ways. Over time, the fraction of a society's industry within each sector
changes.
At the top level, industry is often classified according to the three-sector theory into sectors:
 primary (extraction and agriculture),
 secondary (manufacturing), and
 tertiary (services). ... Over time, the fraction of a society's industry within each sector changes.

Industries are part of the secondary activity. Secondary activities or manufacturing converts raw material into
products of more value to people. Industry refers to economic activities concerned with the production of goods,
extraction of services and provision or services. Hence we can say that Industries are concerned with:
 Production of good (steel energy)
 Extraction of minerals (coal mining)
 Provision for services (tourism)
 There are also Emerging Industries: ‘Sunrise Industries’1. Raw material

 Agro-based industries: These industries use plants and animal-based products as their raw materials. Examples,
food processing, vegetable oil, cotton textile, dairy products, and leather industries.
 Forest-based industries: These industries use raw materials from the forest like wood. The industries connected
with forest are paper, pharmaceutical, and furniture.
 Mineral based industries: Mineral-based industries are based on mining and use ‘mineral ore‘ as raw material.
These industries also provide to other industries. They are used for heavy machinery and building materials.
 Marine-based industries: Marine-based industries use raw materials from sea or ocean. Examples, fish oil.
 Forest-based industries: These industries use raw materials from the forest like wood. The industries connected
with forest are paper, pharmaceutical, and furniture.

Primary industry
This sector of a nation’s economy includes agriculture, forestry, fishing, mining, quarrying, and the extraction of
minerals. It may be divided into two categories: genetic industry, including the production of raw materials that may be
increased by human intervention in the production process; and extractive industry, including the production of
exhaustible raw materials that cannot be augmented through cultivation.
Secondary industry
This sector, also called manufacturing industry,
1. takes the raw materials supplied by primary industries and processes them into consumer goods, or
2. further processes goods that other secondary industries have transformed into products, or
3. builds capital goods used to manufacture consumer and non consumer goods. Secondary industry also includes
energy-producing industries (e.g., hydroelectric industries) as well as the construction industry.

Tertiary industry
This sector, also called service industry, includes industries that, while producing no tangible goods, provide services
or intangible gains or generate wealth. In free market and mixed economies this sector generally has a mix of private
and government enterprise.
The industries of this sector include banking, finance, insurance, investment, and real estate services; wholesale,
retail, and resale trade; transportation, information, and communications services; professional, consulting, legal, and
personal services; tourism, hotels, restaurants, and entertainment; repair and maintenance services; education and
teaching; and health, social welfare, administrative, police, security, and defense services.