Q.1. Elaborate the significance of social responsibilities.

Ans:

A business, in the classical view, was considered to be functioning in a socially responsible way if it

strived to utilize, as efficiently as possible, the resources at its disposal for supplying the goods and

services that society wanted at prices customers were willing to pay. If this was done well, business

would get maximum profits. The view underwent a change in the 1930’s. The view then advanced

was that managers of large business houses must make decisions so as to maintain an equitable

balance among the claims of shareholders, employees, customers, suppliers, governments and the

general public. Managers were considered trustees of these interests, the profits of the business in

the short run may be less than the maximum, but in the long run the profit interest of the company

would be maximized.

Another major break from the older concept is now taking place. It is the view that business

must get deeply involved in dealing with major social problems. It must undertake to do things

which are not permitted within the traditional boundaries of business decision making. Parallel

thought is a deep concern about the human values of the employees of the company. Here, too,

actions may be accepted which do not directly increase and may actually reduce profits, at least in

the short run. While there is no consensus about these current ideas, it does seem clear that the

underlying thought is distinctly different from the past views of balancing interests and of profit

maximization.
Meaning of Social Responsibilities:

Four our purposes, social responsibilities of a business may be considered from three points

of view all of which are closely interrelated, not mutually exclusive, and by no means capable of

covering all meanings of social responsibility in use today.

i. Conceptual. Social responsibilities refer to the obligations of business to “pursue those policies, to

make those decisions, or to follow those lines of action which are desirable in terms of the

objectives and values of our society”. Thus, actions taken by a business which, in some degree,

helps society to achieve one or more of its objectives are socially responsible actions. In this

context, it is useful to distinguish between those which may be classified as internal or external to

business. Internal social responsibilities, for instance, are concerned with assuring due process,

justice, equity and morality in employee selection, training, promotion and firing, or, they may relate

to such things as increasing employee productivity, or improving employee’s physical environment.

External social responsibilities refer to such actions as stimulating minority entrepreneurship,

improving the balance of payments, or training and hiring hard-core unemployed.

ii. Impact on Profits. A company may take socially responsible actions which serve to improve short

run profits. For instance, a company may install a machine to replace one which is hazardous to

workers. In doing so it may also set forth new rules concerning workers’ bonus and promotion which

result in higher productivity while at the same time erase injustices. Actions can be taken which

clearly reduce profits. Installing expensive anti-pollution devices, the costs of which cannot be

passed on to consumers, will do so.

Businessmen will not take actions which will reduce both short and long run profits. They

may be willing to take an action that reduces short run profits if they believe that it will somehow

increase long run profits. Hence, rationalization of specific actions which cut short run profits on the

ground that long run profits will be expanded may lack conviction.

Social responsibility may also refer to an obligation, a liability, social consciousness,

corporate legitimacy, charitable contribution, “do goodism” managerial enlightenment, and so on.

Most businessmen prefer words other than social responsibility because these words to them
connote a fixed obligation with unclear commitments. They prefer such synonyms as social

concern, social programmes, social challenge, social commitment or concern with public problems.

iii. Specific Social Responsibilities. The social responsibility of business can be better appreciated if

we move away from abstract to concrete specific responsibilities to be pursued by the business.

Q.2. Write a note on industrial policy.

Ans:

Gaul (1995) defines industrial policy ‘as the set of government interventions that by way of taxes (or

subsidies and regulations on domestic products or factors of production attempt to modify the

allocation of domestic resources that results from the free operation of the market’. The problem for

the CEC has been to prevent the governments of individual member states from subsidising their

own industries and thus undermining the operation of free intra-EC trade. Under Articles 92-94 of

the Treaty of Rome (1957) the EC Commission forbids national governments from subsidising the

direct costs of its domestic firms in a way which distorts competition between member states.

Export aid is not allowed. Some exceptions are made, most importantly for ‘aid intended to promote

the economic development of regions where the standard of living is abnormally low or where there

is serious under-employment’ (Ibid. Art. 92). The subsidies that are allowed are for investment,

rationalization or research and development (R & D) expenditure.

In the CEC’s operations, competition and industrial policies have become inextricably

interwoven with its trade policy and these policies, in turn, have come into conflict with the political

objectives of governments in member states. Furthermore, the orientation of CEC policy has

gradually shifted from one which involved intervention with the use of public money, to competition

and liberalisation. Jacques Delors who was president of the Commission from 1985 to 1994, was a

socialist and in favour of intervention, but the lack of success of this policy, coupled with the

appointment of a number of more liberal commissioners, led to a shift in policies.

The Competition Directorate is constantly upbraiding the governments of member states for
excessive subsidies; generally, this is either for their champions, or for plants in areas of high

unemployment. Germany, once the upholder of free market principles, is now regarded as the worst

offender after Italy. EU figures show that in 1992-94. German subsides were 2.6 per cent of GDP

and 5.4 per cent of public spending; subsides to industry were ECU 2012 ($1,812) per employee,

pushed up by the massive payments to Eastern Germany. The Kiel Institute of World Economics

calculates that the total of direct subsidies and tax breaks is even higher at DM 300bn per year,

equal to 8.6 per cent of GDP, and that if you include credits and guarantees from public sector

banks, it would be raised to DM 400bn.

It remains to question whether subsidies on this scale are compatible with a market

economy. this resort to subsidies represents, partly, an attempt by the German government to retart

do-industrialisation and the decline of the coal industry, party an endeavour to reduce

unemployment in Eastern Germany and partly due to decline in the state of the economy. The

Competition Commissioner, Karely Van Miert, is still arguing about the aid offered to Volkswagen

for two plants in Lower Saxony which amounted to DM 300,000 (around 100,000) per job. Aid to the

banking sector and shipbuilding are also being investigated (Tucker and Norman 1997).

Q.3. Define capitalism and explain its features.

Ans:

“The capitalist system is one which is characterized by private ownership of the means of

production, individual decision making and the use of the market mechanism to carry out the

decision of individual participants and facilitate the flow of goods and services in markets”.

The capitalist system is also known as free enterprise economy and market economy.

Two types of capitalism may be distinguished, viz.

i. The old, laissez-faire capitalism, where government intervention in the economy is absent or

negligible; and
ii. The modern, regulated or mixed capitalism, where there is a substantial amount of government

intervention.

Features

The principal characteristics of a “pure” capitalist system are:-

i. Private Ownership: In a capitalist economy, the factors of production-land, labour and capital –

are privately owned, and production occurs at private initiative. Individuals have their property rights

protected and are usually free to use their property as they like as long as they do not infringe on

the legal property rights of others. Private property, however, is protected, controlled and enforced

by law.

ii. Free Enterprise: This is an essential feature of the capitalist system is merely an extension of

the concept of property rights. The term free enterprise implies that private firms are allowed to

obtain resources, to organise production and to sell the resultant product in any way they choose. In

other words, there will not be any government or other artificial restrictions on the freedom and

ability of the private individuals to carry out any business.

iii. Consumers’ Sovereignty: This is at its best in the capitalist system where consumers have

complete freedom of choice of consumption. The production decisions in the free market economy

are based on the consumer desires which are reflected in the demand pattern. Frederic Benham

remarks, “Under capitalism, the consumer is the king”.

iv. Freedom of Choice of Occupation: In a capitalist economy, the individual is free to choose any

occupation he is qualified for. This freedom of choice enables the worker to make the best possible

bargain for his labour. This implies that the employers have to competitively bid for labour.

Freedom of occupational choice however, does not mean guarantee of job a worker opts for; the

choice is practically limited by the extent of availability of the jobs.

v. Freedom to Save and Invest: The freedom to save is implied in the freedom of consumption.

The term saving implies the sacrifice of consumption. As George Halm observes: “The right to save

is supported by the right to transmit wealth so that the choice between present and future
consumption is not limited to the adult life of one person. The freedom to save, inherit and

accumulate wealth is, therefore, a right which is perhaps more typical for the private enterprise

system than is free choice of consumption and occupation”.

vi. The Market System: The market mechanism is the key factor that regulates the capitalist

economy. A market economy is one in which buyers and sellers express their opinions about how

much they are willing to pay or how much they will demand of goods and services. Prices guide the

purchase decisions of the consumers. At the same time, while they decide to buy or not to buy a

product, consumers volte for or against the product by using their money. Thus, market prices,

which reflect the desires of millions of consumers, provide guidance to investors and other business

persons. The market system, also called the price system, may, therefore, be regarded as the

organising force in a capitalist economy.

vii. Competition: Among sellers and buyers competition is an essential feature of an ideal capitalist

system. Competition reduces market imperfections and associated problems. Therefore, in a free

market economy, “a sufficient amount of competition is necessary in a private enterprise economy

to keep initiative constantly on alert, to protect the consumer and to maintain a sufficiently flexible

price system”.

viii. Absence of Central Plan: As is clear from the features mentioned above, the capitalist system

is essentially characterised by the absence of a central plan. That is, the activities of the numerous

economic units in a capitalist system are not guided, coordinated or controlled by a central plan.

Freedom of enterprise, occupation and property rights rule out the possibility of central plan.

Resource allocation and investment decisions in a free market economy are influenced by market

forces rather than by the State.

ix. Limited Role of Government: The absence of a central plan does not mean that the

government does not play any role in a private enterprise economy. Indeed, government

intervention is necessary to ensure some of the essential features and smooth functioning of the

capitalist system. For example, government interference is necessary to define and protect property

rights, ensure freedom of entry and exit, enforce contractual agreements among private
entrepreneurs, ensure the satisfaction of certain community wants, etc. However, government

interference in the system is comparatively very limited.

The pure capitalist system which has been described above is a highly idealized system.

There is hardly any pure capitalist or free enterprise system in the real world today. The capitalist

economies of today are characterised by state regulation in varying degrees.

Q.1. Explain the differences between private and public company.

Ans:

On the basis of the number of members, companies are of two kinds (i) private companies (ii) public

companies.

A private company is a company which, by its articles (a) restricts the right to transfer its

shares, if any (b) limits the number of its members to fifty, excluding its present or past employees

and (c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the

company.

Where two or more persons hold one or more shares jointly in the company, they shall be

treated as a single member for the purpose f this definition [Sec. 3(1) (iii)].

In a private company without share capital, the articles need not contain the provisions for

restricting the right of members to transfer shares [Sec. 27(3)].

The minimum number required to form a private company is two. A private company shall

add the words “Private Limited” at the end of its name and it may commence its business

immediately after obtaining a certificate of incorporation. But it should be noted here that a public

company, after obtaining the certificate of incorporation, has to comply with certain formalities to

obtain a certificate of commencement of business, after which only it is entitled to do so. Private

companies are usually family concerns, since shares are generally held by members of the family.

The basic point of a private company is that shareholders have the advantage of limited liability and

its affairs remain secret to a considerable extent.

 A public company is that which is not a private company [Sec. 3(1) (iv)]. This means that it

may invite the general public to subscribe for any shares in, or debentures of, the company.

However, this is not binding on the company. Similarly, the limit for a maximum of fifty members as

applicable to a private company is not applicable here. However, the minimum number of members

required to form a public company is seven. At the same time the articles need not contain a clause

for restricting the right of members to transfer their shares. These are freely transferable. It should

also be noted that a public company must add the word “Limited” at the end of its name.

Differences between Private and Public Company

1. The number of members in a private company is two while a public company must have at least

seven.

The maximum number of members in a private company cannot exceed fifty, excluding its

present or past employees. In the case of a public company, there is no maximum limit on

members.

2. In a private company the words “Private Limited” shall be added at the end of its name. In a

public company, the word “Limited” only shall be added at the end of its name.

3. In a private company, the articles restrict the right of members to transfer their shares whereas in

a public company, the shares are freely transferable.

4. A private company, the articles restrict the right of members to transfer their shares whereas in a

public company, the shares are freely transferable.

5. A private company shall have at least two directors, and a public company, at least three.

6. In a public company, the directors must file with the registrar, their consent to act as such, in

writing. Similarly, they must sign the memorandum or enter into a contract for their qualification

share. At least two-thirds of the directors of a public company must retire by rotation. They cannot

vote on a contract in which they are personally interested. These restrictions, however, do not apply

to the directors of a private company.

7. In a public company the total managerial remuneration is 11 per cent of the profits. In case of

inadequate profits a sum not exceeding Rs. 50,000/- can be paid to all managerial personnel with
the approval of the Central Government. These restrictions again do not apply to a private

company.

8. A private company cannot issue share warrants while a public company can.

9. A private company is not required to hold a statutory meeting whereas a public company must do

so after one month, but before six months of obtaining the certificate of commencement of

business.

10. A private company may commence its business immediately after obtaining a certificate of

incorporation. A public company cannot commence its business until it is granted a “certificate of

commencement of business”.

Q.2. Write a note on economics of scale.

Ans:

Various factors may give rise to economies of scale that is to decreasing long run average

costs of production.

1. Greater specialisation of resources: With an expansion of a firm’s scale of operation, its

opportunities for specialization – whether performed by men or by machines – are greatly

enhanced. It is because a large-scale firm can often divide the tasks and work to be done more

readily than a small-scale firm.

2. More efficient utilization of equipment: In some industries, the technology of production is

such that large units of costly equipment have to be used. The production of automobiles, steel and

refined petroleum are obvious examples. In such industries, companies must be able to afford

whatever equipment is necessary and must be able to use it efficiently by spreading the cost per

unit over a sufficiently large volume of output. A small-scale firm cannot ordinarily do these things.

3. Reduced unit costs of inputs: A large-scale firm can often but its inputs such as raw materials

at a cheaper price per unit and thus get discounts on bulk purchases. Moreover, for certain types of

equipment, the price per unit of capability is often much less than larger sized purchases.
4. Utilization of by-products: In certain industries, large-scale firms can make effective use of

many by-products that would go waste in a small firm. A typical example is the sugar industry where

by-products like molasses and bagasses are made use of.

5. Growth of auxiliary facilities: In certain places, an expending firm often benefits from, or

encourages other firms to develop, ancillary facilities such as warehousing, marketing and

transportation systems thus saving the growing firm considerable costs. For example, commercial

and industrial establishments often benefit from improved transportation and warehousing facilities.

6. Diseconomies of Scale: With continuous expansion of the scale of operation of a firm, a point

may ultimately be reached when diseconomies of scale begin to exercise more than offsetting effect

on the firms’ cost curve. As a result, the long-run average cost curve starts to rise.

Q.3. Discuss the dynamics of European Union.

Ans:

The degree of integration achieved by the EU has been steadily evolving along three

dimensions.

i. Integration among Existing Members: The programme to complete the internal market,

discussed above, is a good example of this process. So are the attempts to approach

monetary union, which will be discussed below.

ii. Addition of New Members: As we have seen, the common market expanded from its original

six members in 1957 t twelve by 1986. Austria, Finland, Norway, and Sweden have applied for

membership and negotiated terms of entry. Expectations are that, at some indefinite times in the

future, additional countries in southern and Central Europe will also join.

In negotiating with new applicants, the EI is run. Thus new applicants face a take-it-or-leave-

it situation.

i. Integration among Existing Members: The programme to complete the internal market,
discussed above, is a good example of this process. So are the attempt to approach monetary

union, which will be discussed below.

ii. Addition of New Members: As we have seen, the common market expanded from its original

six members in 1957 to twelve by 1986. Austria, Finland, Norway, and Sweden have applied for

membership and negotiated terms of entry. Expectations are that, at some indefinite times in the

future, additional countries in southern and Central Europe will also join.

In negotiating with new applicants, the EI is run. Thus new applicants face a take-it-or-leave-

it situation. Partly because of this, joining the EU becomes a controversial political issue in countries

that have applied for and negotiated terms of entry. When Denmark, Ireland and United Kingdom

joined in 1973, Norway, which had also negotiated to enter, declined to do so after its voters voted

no in a referendum. Greenland, which automatically became part of the EU when Denmark joined,

subsequently pulled, out. The issue of entry is thus very controversial with the new applicants.

iii. Integration with Outsiders: The EU has developed preferential arrangements with a number of

other countries and groups of countries. The General System of Preferences (GGP) extends tariff

countries. The General System of Preferences (GSP) extends tariff preferences to most developing

countries. The Rome Convention grants further preferences and extends other forms of aid to a

group of LDSs that are former colonies of EI members. The free-trade agreement with the EFTA

has already been mentioned. On January 1, 1994, this was introduced into the European Economic

Area (EEA) to allow free migration, investment and trade in services in addition to trade in goods

among the participants. These include the twelve members of the EU, the four new applicants

mentioned above plus Iceland, Switzerland, also a member of the EFTA, declined to participate in

the EEA after negative result in a 1992 referendum.

The EU has negotiated European agreements with Czechoslovakia (now two countries),

Hungary, and Poland (CHP). These provide for the phasing in of a free-trade area in manufactured

goods, preferences for EU direct movement in CHP and for CHP gradually to adjust a battery of its

economic policies to EU standards. Migration is not provided for; indeed, a desire to substitute trade
for migration was an important motivation for the EU. In spite of the agreements, the EU has

initiated anti-dumping actions against some CHP products.