INDUSTRIAL ECONOMICS AND ENTREPRENEURSHIP DEVELOPMENT UNIT -1 COMPILED BY Prof.

RUPESH DAHAKE Page 1

Unit-1- INDUSTRIAL ECONOMICS
(Industrial economics, Types of Business structures, top and bottom line of the organization, economic analysis of business, economics of operations,
economic prudence in business.)

Introduction:- the term industrial was probable originated for the first time in the early 50s through the writing of P.W.S.
Andrews. It is also entitled as industrial organization, industrial economics, industry and trade and industrial organization
and policy.

Meaning of Industrial Economics:-
Industrial economics is that branch of microeconomics which studies the economic problems of firms and industries and
their relationship with the society as a whole.

Definition: - in the worlds of P.R.Ferguson and G.J.Ferguson Industrial economics is best defined as the application of
microeconomic theory to the analysis of firm, market and industries.
Microeconomics is that the way in which individual market works. It may be noted here that both microeconomics and
industrial economics are concerned with the economic aspect of firms and industries seeking to analyze their behavior and
draw their normal implications.
Industrial Economics Features:-
Industrial economics is less formal and more inductive in nature.
Industrial economics down not believe in single goal of profit maximization. It searches the goals of the firm from
revealed facts.

Industrial Economics is Descriptive: industrial economics is descriptive in the sense that is attempts to interpret observed
phenomenon and to formulate theories about possible cause and effects relationship.

Industrial Economics is Prescriptive: - industrial economics is prescriptive in the sense that it attempts to predict the
outcome of specific decision of an industrial organization. Thus the principles developed in industrial economics may be
used to prescribe the most efficient way to achieve an industrial organization objective such as profit maximization.

1. Sole Proprietorship - This is the simplest and most common form of business which an owner can start, as registration is
not required (though a license may be necessary). Sole proprietorship involves only one individual who owns and operates
the enterprise. The liability of the owner is unlimited. It may be a good choice for the production of goods which involve
manual skill e.g. handicrafts, filigree works, jewellery-making, tailoring, hair cutting etc. All profits and losses are borne by
the owner, and the owner alone. The entire capital of the business is provided by the owner, though she may raise more
funds from outside through loans.
Advantages of a Sole Proprietorship:
It is the cheapest and easiest form of business structure
The owner can keep or reinvest the income as she wishes
The owner is in complete control of the business
This business is easy to set up and also easy to dissolve
The liability of the proprietor is unlimited
There are less legal formalities
INDUSTRIAL ECONOMICS AND ENTREPRENEURSHIP DEVELOPMENT UNIT -1 COMPILED BY Prof.RUPESH DAHAKE Page 2

Disadvantages of a Sole Proprietorship:
The owner is responsible for all debts related to the business
It can sometimes become hard to attract employees of higher quality, especially during the setting up stages of the
business
Funds are limited to only personal savings and loans or borrowings from family or friends
Because of the fact that it is difficult to raise capital, this business entity may have limited growth potential
Unlimited liability
2. Partnership - A partnership is a form of business entity formed by an agreement between two or more people to own and
run the business. Each owner, or partner, shares in the decision making and responsibilities. This arrangement enables
enterprising individuals to pool their resources to establish and expand a business. The owners of a partnership business are
individually known as partners and collectively as a firm. Partners have an equal share in the losses and the profits made by
the company (or as the agreed split may be). Such firms are most suitable for comparatively small businesses such as retail,
wholesale trade, professional services and small manufacturing units. Partnership Firms in India can have a minimum of two
partners and a maximum of 20 partners; however, the banking businesses are allowed a maximum of 10. The relation
between the partners is created by a contract which may be verbal, written or implied and it is known as the Partnership
Deed. The partners can share profits in any ratio. Generally, a partnership deed contains certain particulars:
Advantages of a Partnership:
Partnerships are easy to establish and the work and responsibilities are shared
There is an increased possibility of raising funds, as capital can be pooled together
The partners have mutual support and motivation, which is especially important for new entrepreneurs
Disadvantages of a Partnership:
The profits made must be split among the partners in the ratios which are agreed upon
There may be conflicts arising out of shared decisions
Partnerships have a limited life and can end upon the withdrawal of partnership or by the death of one of the
partners
There are also several restrictions on the transfer of rights and there is lack of unanimous authority
3. Private Limited Company - A private limited company is defined by the limited liability of its shareholders and restrictions
on share transfers. The minimum paid up capital at the time of incorporation of a private limited company is INR 1,00,000. It
can be increased at any time, by certain payments of stamp duties and registration fees. A private limited company must
have a minimum of two and a maximum of 50 members as its shareholders, as well as a minimum of two directors and
maximum of 12 directors. When the paid-up capital is equal to or exceeds INR 50 million, a company secretary must be
appointed. The shareholders and directors need not be Indian citizens. A private limited company has a separate legal
identity.
Advantages of a Private Limited Company:
Relatively less compliance requirements than on a Public Limited Company
It is an ideal business entity, when the shares of the company will be closely held and when there is no requirement
for more capital to be raised through public issue
INDUSTRIAL ECONOMICS AND ENTREPRENEURSHIP DEVELOPMENT UNIT -1 COMPILED BY Prof.RUPESH DAHAKE Page 3

Disadvantages of a Private Limited Company:
There are some restrictions on share transfers, as nobody but the members of the company are allowed to transfer
shares, and even those transfers have some regulation
While most of the time, shareholders have limited liability, there have been cases where the director or the
manager of the company does not have that protection
4. Public Limited Company - A public limited company is a company limited by shares in which there is no restriction on the
maximum number of shareholders, transfer of shares and acceptance of public deposits. The liability of each shareholder is
limited to the extent of his or her owned shares worth. A public limited company is an independent entity and is perpetual,
irrespective of death, retirement or insolvency of shareholders. The minimum paid up capital is INR 5,00,000 and the
company must have a minimum of seven shareholders and a minimum of three directors and maximum of 12 directors.
Advantages of a Public Limited Company:
You can raise a lot more capital through the sale of shares, which is the largest difference between a Public Ltd.
Company and a Private Ltd. Company
Liability is limited to the amount of shares owned by a member; she bears no responsibility as to the creditors of the
firm
Disadvantages of a Public Limited Company:
Extremely strict regulations through the Indian Companies Act, 1956 involving registration and operation
You may lose control of your company to outside investors as they attempt to refashion corporate management to
suit their liking
Similarly to a private limited company, the director/manager may have unlimited liability
5. HUF (Hindu Undivided Family):
There is no membership other than the members of a Hindu family.
All coparceners have an equal share in the profit of the business.
The management of the business is in the hands of the senior most family member who is known as the Karta.
The liability of each member of HUF is limited to the extent of his/her share in the business, but the liability of the
Karta is unlimited.
The individual share of each coparcener. This is because every birth of a male child in the family adds to the number
of coparceners and every death of a coparcener reduces the number.
A Joint Hindu family business continues to exist on the death of any coparcener. Even on the death of the Karta, it
continues to exist as the next senior most family member becomes the Karta. However, a joint Hindu family business
can be dissolved at any time, either through mutual agreement between members or by division of its assets.
6. Co-operative:
Individuals having a common interest can come together to form a co-operative society
The minimum membership required to form a co-operative society is 10 and the maximum number is unlimited
The registration of a society under the Co-operative Societies Act is mandatory. Once it is registered, it becomes
a body corporate and enjoys certain privileges just like a joint stock company
INDUSTRIAL ECONOMICS AND ENTREPRENEURSHIP DEVELOPMENT UNIT -1 COMPILED BY Prof.RUPESH DAHAKE Page 4

The primary objective of any co-operative organization is to render services to its members, in particular, and to
society in general
Every member has a right to take part in the management of the society. Each member has one vote. Generally
the members elect a committee known as the Executive Committee to look after the day to day administration
and the said committee is responsible to the general body of members
A co-operative organization starts with a fund contributed by its members in the form of units called shares. It
can also easily raise loans and secure grants from the government.
The return on capital subscribed by the members is in the form of a fixed rate of dividend after necessary
deductions from the profits.

Top and bottom line of the organization
Topline
When reporting performance, corporate entities post the periods sales number as the first entry in the top-line of the
income statement. So, generally, when people make remarks on revenue growth of a company they refer to it as top-line
growth. This figure assumes significance as it brings to fore the companys business prospects. Breaking up the sales figure
to know what helped its growth is essential as it would only aid in deciphering whether the increase is sustainable or not.
Higher sales can be a result of either increase in volumes (units sold) or increase in realisation. By realisation, we mean
revenue (selling price) made per unit sold.
Again, there could be two scenarios when a company can see higher realisation. One is when the demand for the specific
product goes up and the price shoots up on tight supplies and, two, when the company delivers value-added products that
command better price in the market over peer products. Top-line growth speaks of how efficient the company has been in
exploiting the opportunities in the market.
Bottom-line
The bottom-line or the bottom figure in an income statement is the net profit of the company. This is what the company is
left with after paying all its expenses (both operating and administrative) for the period reported. A companys bottom-line
generally denotes the efficiency of the management in controlling costs even as it delivers higher sales.
Higher sales in the period will push up net profits, similar to how reduced expense would. In other words, growth in net
profits does not necessarily mean fall in expenses; it could be bolstered by higher sales too. Suppose, X company registers a
30 per cent increase in sales and a 10 per cent increase in total expenses, its net profit could be higher despite higher
expenditure on higher revenues.
That, however, may be the least of the challenges for corporates, as the real big challenge comes during recessionary times
like now when demand slumps and so does sales, making reduced or negative growth. Posting profits in such times is
possible only through identifying cost-reduction possibilities and reducing operational inefficiencies. In the December
quarter of 2008, only a few companies were seen posting bottom-line growth despite a fall in top-line. Few companies such
as Siemens, MIC electronics and Cadila Healthcare managed to grow profits despite a fall in sales. However, here again not
all cases were examples of operating efficiencies. Some saw profits soar due to higher other income. Whats other income?
Well, thats a different story altogether.
Economic analysis of business:-
INDUSTRIAL ECONOMICS AND ENTREPRENEURSHIP DEVELOPMENT UNIT -1 COMPILED BY Prof.RUPESH DAHAKE Page 5

Whether it is a business situation or a day-to-day event in somebodys personal life, there is a large number of economic
decisions making involved. One can manage many of these decision problems by using simple economic analysis.
EXAMPLES FOR SIMPLE ECONOMIC ANALYSIS:-
Material Selection for a Product/Substitution of Raw Material
The cost of a product can be reduced greatly by substitution of the raw materials. Among various elements of cost, raw
material cost is most significant and it forms a major portion of the total cost of any product. So, any attempt to find a
suitable raw material will bring a reduction in the total cost in any one or combinations of the following ways:
Cheaper raw material price
Reduced machining/process time
Enhanced durability of the product
Therefore, the process of raw material selection/substitution will result in finding an alternate raw material which will
provide the necessary functions that are provided by the raw material that is presently used. In this process, if the new raw
material provides any additional benefit, then it should be treated as its welcoming feature.
Design Selection for a Product:-
The design modification of a product may result in reduced raw material requirements, increased machinability of the
materials and reduced labour. Design is an important factor which decides the cost of the product for a specified level of
performance of that product.
Building Material Selection:-
As discussed in the introduction to this chapter, the sourcing of raw materials will have a significant effect on the cost of any
product. Hence, it is assumed that the price of raw material is location dependent. While sourcing a raw material, the cost of
transportation is to be considered in conjunction with the price of the raw material.
Process Planning /Process Modification
While planning for a new component, a feasible sequence of operations with the least cost of processing is to be considered.
The process sequence of a component which has been planned in the past is not static. It is always subject to modification
with a view to minimize the cost of manufacturing the component. So, the objective of process planning/process
modification is to identify the most economical sequence of operations to produce a component.
The steps in process planning are as follows:
1. Analyze the part drawing to get an overall picture of what is required.
2. Make recommendations to or consult with product engineers on product design changes.
3. List the basic operations required to produce the part to the drawing or specifications.
4. Determine the most practical and economical manufacturing method and the form or tooling required for each operation.
5. Devise the best way to combine the operations and put them in sequence.
6. Specify the gauging required for the process.

Economics of operations/Scale:-
INDUSTRIAL ECONOMICS AND ENTREPRENEURSHIP DEVELOPMENT UNIT -1 COMPILED BY Prof.RUPESH DAHAKE Page 6

In microeconomics, economies of scale are the cost advantages that enterprises obtain due to size, output, or scale of
operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more
units of output. Often operational efficiency is also greater with increasing scale, leading to lower variable cost as well.
Economies of scale apply to a variety of organizational and business situations and at various levels, such as a business or
manufacturing unit, plant or an entire enterprise. For example, a large manufacturing facility would be expected to have a
lower cost per unit of output than a smaller facility, all other factors being equal, while a company with many facilities
should have a cost advantage over a competitor with fewer.
Some economies of scale, such as capital cost of manufacturing facilities and friction loss of transportation and industrial
equipment, have a physical or engineering basis.
The economic concept dates back to Adam Smith and the idea of obtaining larger production returns through the use of
division of labor. Diseconomies of scale are the opposite.
Economies of scale often have limits, such as passing the optimum design point where costs per additional unit begin to
increase. Common limits include exceeding the nearby raw material supply, such as wood in the lumber, pulp and paper
industry. A common limit for low cost per unit weight commodities is saturating the regional market, thus having to ship
product uneconomical distances. Other limits include using energy less efficiently or having a higher defect rate.
Large producers are usually efficient at long runs of a product grade (a commodity) and find it costly to switch grades
frequently. They will therefore avoid specialty grades even though they have higher margins. Often smaller (usually older)
manufacturing facilities remain viable by changing from commodity grade production to specialty products.
Economic Prudence in Business:-
1. Industrial economies presents all those traditional aspects of economies which are relevant to real-life business
decision-making, Industrial economics takes from economic theory, the concepts, principles and techniques of
analyses which have an impact on the decision-making process. These are adapted and modified according to the
situation so that the manager can take better and clear decisions. Thus industrial economics accomplishes the
objective of building a suitable toolkit from traditional economics,
2. Industrial economics uses data and ideas from other disciplines like sociology and psychology-, if they are found
relevant for decision-making. It takes the help of other disciplines which have an impact on the business decision of
the company.
3. Industrial economics helps in reaching a decision for complex problems, for example. What the best size is of should
be produced? What technique should be used? What is the best size of the new plant? How should the available
capital be allocated?
4. Industrial economics can capture essential relationships which characterize the situation and it leaves out the
irrelevant information, Indusirial economics serve as a integrating agent by coordinating the different functional
areas of the company like finance, marketing, personnel, production etc.
5. Industrial economics takes into account the interaction of the company and the society, The Company has certain
social obligations as well as obligation to shareholders etc. The company should become a socially-oriented
business.