CA Foundation Business & Commercial Knowledge Study Material – Banking Terminology

CA Foundation Business & Commercial Knowledge Study Material Chapter 6 Common Business Terminologies – Banking Terminology

Banking Terminology

  • Acceptance: A signed acknowledgement indicating the acceptance of all the terms and conditions of an agreement.
  • Accepting house: A bank or financial institution engaged in acceptance and guarantee of bills of exchange.
  • Account balance: The net amount standing on the credit/debit side of the bank account of a customer.
  • Account payee cheque: A cheque the payment of which can only be credited to the bank account of the payee.
  • Accrued interest: Interest earned but not yet paid, also known as interest receivable.
  • Administered rates: Rates of interest which can be changed through a contract between the lender and the borrower, or by the Government.
  • American depository receipt (ADR): A receipt equal to the specific number of shares issued by a company in a foreign country. ADRs are traded only in the United States of America.
  • Annuities: Periodic payments in exchange for deposit of a sum of money.
  • Automated clearing house: A nationwide electronic clearing house that administers and monitors the cheque and fund clearance between banks. Through it debit and credit balances are distributed automatically.
  • Automated teller machine (ATM): An electronic machine through which money can be withdrawn and deposited at any time and on any day.
  • Balance transfer: Transfer of funds from one account to another or repayment of a loan with the help of another loan.
  • Bank account: An account with a bank.
  • Bank draft: A cheque drawn by a bank on its own branch or on another bank. It is payable on demand and also known as demand draft.
  • Bank passbook: A book containing data of transactions between a bank and its customer.
  • Bank rate: The rate of interest at which commercial banks can draw from the Reserve Bank of India for a long time period.
  • Bank reconciliation statement: A statement prepared to reconcile the difference between balances shown in cash book and passbook.
  • Bank statement: A Statement showing transactions between a bank and its customer during a specified time period.
  • Basis point: A measure in interest rate, stock market indices and market rates. It is 1 /100 of one per cent e.g. Rs. 0.001.
  • Bearer cheque: A cheque that can be encashed by its holder on the bank counter. It is transferable by mere delivery.
  • Bill discounting: Encashing a bill of exchange at a discount before the date of its maturity.
  • Bridge finance: Finance raised to fill up the time gap between a short term loan and long term loan also known as gap finance.
  • Bounced cheque: A cheque which the bank refuses to encash due to lack of adequate balance or for any other valid reason.
  • Cap: A limit to which rate of interest can be changed.
  • Cash credit: A revolving credit arrangement under which a bank allows the customer to borrow upto the specified amount, interest is charged only on the amount actually withdrawn.
  • Cash reserve: The total amount of cash available in the bank account and can be withdrawn immediately.
  • Cashier’s cheque: A cheque drawn by a bank to make payments to the banks or any other party.
  • Cheque: A negotiable instrument that instructs the bank to pay the specified amount from the drawer’s account to the payee.
  • Certificate of deposit: A certificate of making deposit premising to pay the depositor the deposited amount along with interest.
  • Chattel mortgage: Loan against the movable assets as collateral.
  • Clearing: The process of transferring the amount of a cheque from the payer’s account to the payee’s account.
  • Clearing house: Meeting of representatives of different banks to clear and confirm balances with each other. It is managed by the country’s Central Bank.
  • Compound interest: Calculating interest on the principal amount and accumulated interest.
  • Current account: A bank account from which money can be withdrawn as many times a day as needed and overdraft can be obtained.
  • Debit card: An instrument obtained after making payment and used to buy things by swiping it. Deposit slip: A slip containing details of money deposited in a bank account.
  • Depositor: The person who deposits, money into a bank account.
  • Debt recovery: The process of recovering money from a debtor by selling of collators and other assets.
  • Debt repayment: The repayment of debt along with interest.
  • Debt settlement: The process of negotiating the amount which a lender accepts repayment below the amount of debt and accrued interest.
  • E-cash: Use of electronic networks to transfer funds and execute transactions. Also known as electronic cash, digital cash.
  • Early withdrawal penalty: The penalty charged from a customer who withdraws his/her fixed deposit the due date.
  • Earnest money deposit: The deposit made by a buyer of real estate with the seller driving negotiation stage.
  • Education loan: A loan given for the education of the borrower at a concessional rate of interest.
  • Global depository receipt: A receipt specifying the number of shares issued by a company in a foreign country. The receipt is tradable in Europe.
  • Guarantor: One who promises to repay a loan in case the borrower fails to repay.
  • Interest: The charge which a borrower pays to the lender for use of money. It is the cost of credit.
  • Internet banking: Banking transfer done by the Internet. It is also known as online banking or electronic (e)banking.
  • Letter of credit: A written promise by a bank to an exporter to pay the specified amount on behalf of the importer for the goods sold.
  • Line of credit: An arrangement under which a bank allows a borrower to borrow money from time to time without further negotiations and upto the specified limit.
  • Lock-in-period: The time period during which no change in the quoted mortgage rates will be made by the lender.
  • Market value: The value at which consumers are willing to buy and sellers are willing to sell. Decided by demand and supply.
  • Maturity: The date on which an investment/loan becomes repayable.
  • Mortgage: A legal agreement between a lender and a borrower under which real estate is used as a collactral to ensure repayment of the loan.
  • Online banking: Same as internet banking.
  • Overdraft: Withdrawal of money in excess of the balance in the borrower’s current account. Payee: The person to whom money is to be paid.
  • Personal identification number (PIN): A secret code number given to customers to perform transactions through the ATM.
  • Repo rate: The rate at which banks borrow money from the Reserve Bank of India for short periods upto two weeks by pledging government securities.
  • Reverse repo rate: The rate of interest which the Reserve Bank of India pays to banks which deposit their surplus funds for short periods.
  • Smart card: A card with a computer slip used for storage, processing and transmission of data.
  • Syndicated loan: A large amount of loan given by a group of small banks to a single corporate borrower.
  • Time deposit: A bank deposit made for a specific time period, cannot be withdrawn before the expiry of the period.
  • Value at risk (VAR): A sum the value of which is subject to loss due to changes in the rate of interest. Wholesale banking: Banks which offer services to companies, financial and other institutions.
  • Zero balance accounts: A bank account in which no minimum balance is required e.g. Jan Dhan Account.
  • Zero-down-payment mortgage: A mortgage in which the borrower makes no loan payment. The mortgage buys below the amount at the entire purchase price.

CA Foundation Business & Commercial Knowledge Study Material – Marketing Terminology

CA Foundation Business & Commercial Knowledge Study Material Chapter 6 Common Business Terminologies – Marketing Terminology

Marketing Terminology

  • Advertising: Any paid form of non-personal presentation and promotion of ideas, goods and services through mass media such as newspapers, radio, TV, Internet by an identified sponsor.
  • Advertising agency: An organization consisting of experts who render advertising services for payment in terms of fee or commission or both.
  • Advertising campaign: An organization’s programme of advertising for a specific time period. Advertising copy The advertisement containing the message, photograph and other details. Advertising media The channels (e.g. print and electronic media) used to carry advertisements. Advice note A document sent by a seller informing the buyer of dispatch of goods.
  • Agent: A person authorised to act on behalf of another (principal, like buyer and seller and do not take ownership of goods.
  • Auction: An agent who sells goods through action on behalf of his principal.
  • After sale service: The services provided by the manufacturer/dealer to the buyers after selling the product/service.
  • Barrier to trade: Something that makes trade between two countries more difficult or expensive, e.g. a customs duty on imports.
  • Barriers to entry/exit: A barrier to entry/exit of new firms in the market, e.g. economies of scale, government policy.
  • Benchmarking: The process of comparing the products / services, or business processes of an enterprise against the best firm in the industry with the objective of improving quality and performance.
  • Brand: A name, symbol, design, logo or a combination thereof to identify a product and to differentiate it from competing products.
  • Brand equity: The estimated value of a brand on the basis of brand’s loyalty.
  • Brand recognition: Customers awareness of existence of a brand as an alternative for buying.
  • Brand loyalty: Commitment of customers to a brand.
  • Business-to-business (B2B): Marketing activities between two business firms carried through Internet. Business model: A company’s approach for converting its strategy into moneymaker.
  • Business portfolio: A company’s set of businesses or products.
  • Buying behaviour: The process used by buyers to decide whether or not to buy a product/service. It depends upon several internal and external factors.
  • Cash discount: A reduction in the price of products/services given to customers who buy on cash basis.
  • Competitive advantage: An advantage which a firm has over its competitors.
  • Competitive position: The position that a firm takes to face its competitors.
  • Conglomerate diversification: Starting or acquiring businesses which have no synergy with the firm’s exiting business. For example, ITC a tobacco company diversified into hotels, garments, foods and beverages, paper and paper board and agri business.
  • Consortium: A group of several firms which work together to buy something or to build something.
  • Consumer market: The market for products and services which people buy for their own/family’s use.
  • Corporate culture: The values beliefs, traditions, rituals, etc. shared by the members of an organization.
  • Cross-selling: Selling related products to buyers of a product. For example, selling handkerchief, ‘ Socks, ties to buyer of shirts/trousers.
  • Catalogue: A small booklet containing details about the products, their prices etc. of a firm.
  • Chain stores: A group of similar stores selling same products at the same prices, e.g. Bata Stores. Also known as multiple shops.
  • Channel of distribution: The route that a product takes to move from the manufacturer to consumers.
  • Clearing agent: An agent who takes care of customs formalities for imported goods.
  • Consumers’ cooperative store: A retail stored set up by consumers as a cooperative society to get 1 products of daily use at reasonable prices by eliminating middlemen.
  • Customer demand: A customer’s ability and willingness to buy a product/service.
  • Customer need: A basic requirement which a person wishes to satisfy.
  • Customer loyalty: A customer’s inclination to buy repeatedly from the same shop or store.
  • Customer satisfaction: The ability of a product/service to meet the customers expectations in terms of quality and performance in relation to the price paid.
  • Customer wants: The desire for a product/service to satisfy the underlying need. For example,
    hunger the need whereas food is the want.
  • Departmental Store: A large retail store selling a wide range of goods under one roof, goods being
    arranged in different departments.
  • Differentiation: Giving a unique identity to a product/service so that it stands out from rival
    product/services.
  • Direct marketing: Selling products/services directly to consumers, e.g. telemarketing.
  • Diversify: Increasing the range of products /services which a firm produces and sells.
  • E-commerce: Business transactions made through electronic means e.g. Internet,
  • Economies of scale: Reduction in cost per unit due to large scale operations.
  • External environment: The forces and conditions that influence a company’s strategies and competitive position.
  • Factor: An agent who keeps the goods of others for sale on commission basis.
  • Fast moving consumer goods (FMCG): Products of duly use which are low priced, frequently purchased and sell in large volumes, e.g. biscuits, soaps, tooth pastes, packed juices, etc.
  • Forecasting: The process of estimating future demand on the basis of price levels, disposable incomes and other relevant factors.
  • Forwarding agent: The agent who attends to customs formalities on behalf of an exporter. Grading: Classifying agricultural products into different grades on the basis of their quality level.
  • Hire purchase: Buying goods and making payments in installments, goods considered on hire until the payment of the final installment.
  • Indent: A purchase order sent abroad for importing goods.
  • Innovators: Young and intelligent consumers who are the first to adopt new products.
  • Internal marketing: The process of earning support for a company and its activities from its employees.
  • Invoice: A written statement containing details of goods sold. It is sent by the seller to the buyer.
  • Itinerants: Retailers having no fixed place for selling. They move from place to place to sell their goods. Also known as mobile traders.
  • Joint venture: A new enterprise jointly established by two or more firms for some specific purpose and mutual benefit.
  • Labelling: Putting labels on products to indicate its name, contents, price date of manufacture and their necessary details.
  • Marketing: The process of discovering, creating and delivering value to satisfy the needs of a target market at a profit.
  • Market development: The process of offering existing or modified products to new groups of customers.
  • Market entry: Launching a new product into an existing market or a new market.
  • Market leader: A firm having control over a specific market.
  • Marketing Mix: A firm’s mix of product, price, place and promotion. In case of services it consists of three other elements people, process and physical evidence. ‘
  • Marketing plan: The plan covering the use of marketing mix to achieve the firm’s marketing objectives.
  • Market positioning: The marketing strategy for placing a firm’s products/services against competing products/services in the minds of consumers.
  • Market research: The process of systematically collecting, recording and analysing data about problems concerning the marketing of products and services.
  • Market segmentation: Dividing the total market into different parts on the basis of consumer’s characteristics to deliver tailor made offering to each part.
  • Market share: The sales of a product/brand or firm divided by total sales of similar products/ brands of firms in the industry.
  • Market targeting: The process of comparing all market segments and choosing the most attractive segment for a product/service.
  • Mass marketing: Delivering the same message through mass media to all consumers.
  • Merger: Combination of two or more firms into a single firm to expand business operations.
  • Mission: The unique purpose of a company that differentiates it from other companies in the industry, defines it scope of operations and reflects its values and priorities.
  • Niche marketing: Concentrating efforts on relatively small market segments e.g. herbal tea for health conscious consumers.
  • Opportunities: Favourable conditions in the external environment of business.
  • Packing: Designing and manufacturing suitable packages for various types of products.
  • Packing: Putting the product into its package.
  • Personal selling: Oral communication with prospective buyers to make a sale and develop relationships with them.
  • Physical distribution: Activities involved in physical movement of goods from producers to consumers e.g. transportation, warehousing, order processing and inventory control.
  • Pre-emptive pricing: Setting low prices to discourage entry of new suppliers in the market.
    Price discrimination: Charging different prices from different customers for the same product service for reasons other than costs.
  • Price elasticity of demand: Change in demand due to change in price.
  • Price sensitivity: The effect of change in price on customers.
  • Price: The value of product/service expressed in terms of money.
  • Publicity: Promotion of an organisation and its products/services in mass media without payment. Retails Traders who sell directly to customers or ultimate users.
  • Penetration pricing: Charging a relatively low price to gain quick market acceptance of new product/service.
  • Salesmanship: The process of persuading people to buy a product/service through face-to-face interaction.
  • Sales promotion: Any activity used to boost the immediate sales of a product or service e.g. free samples, price off, etc.
  • Target marketing: Using appropriate advertisements to reach out to a group of consumers having similar characteristics.
  • Tele marketing: Using telephone to contact people and sell a product service.
  • Test marketing: Testing of a new product with a sample group of customers to judge their reactions.
  • Unique selling proposition (USP): A customer benefit that no other product/service can claim.

CA Foundation Business & Commercial Knowledge Study Material – Finance, Stock and Commodity Markets Terminology

CA Foundation Business & Commercial Knowledge Study Material Chapter 6 Common Business Terminologies – Finance, Stock and Commodity Markets Terminology

Terminology or vocabulary means a set of basic terms or concepts used in a particular field or discipline. Each and every subject (e.g. Economics, Accountancy, Law, Medicine, Management, etc.) has its own terminology. Good understanding of the correct meaning of the terms used is essential to gain conceptual clarity. A student or professional working in the concerned profession cannot be efficient without understanding the terminology used in the concerned profession. A Chartered Accountant is excepted to know and understand the terminology used not only in finance and accounts but also in related areas such as marketing banking, administration, etc. This is because a Chartered Accountant comes across these terminologies in course of audit.

Finance, Stock and Commodity Markets Terminology

A

  • Above par: Price of a security quoted higher than its face value.
  • Absorption or acquisition: Takeover of a firm by another firm.
  • Accommodation bill: A bill of exchange drawn and accepted without receiving value in exchange. It is means of lending money.
  • Account: A record of transactions relating to one head e.g. debtors.
  • Accountancy: The held of knowledge containing principles and techniques used in preparing accounts. Account current: A running account summarizing business transactions during a given time period.
  • Accounting: The process of measuring, and recording transactions in the books of account.
  • Agent: (broker): One who buys and sells securities on behalf of his clients.
  • Amortize: To charge regular portion of an expenditure over a fixed time period. For example an expenditure of Rs. 50,000 may be amortized over five years, charging Rs. 10,000 per year in the account books. Also called write off.
  • Annuity: An equal amount paid at fixed intervals (e.g. every three months) for a specified period (e.g. twenty years).
  • Appreciation: Increase in the value of an asset e.g. shares purchased for Rs. 1 lakh may be Rs. 5 lakh now. There is an appreciation of Rs. 4 lakh.
  • Arbitrage: Simultaneous purchase and sale of a security/commodity in different markets to take advantage of price differences.
  • Asset: An economic resource expected to give benefit in future. It may be tangible (e.g. a machine) or intangible (e.g. a patents). Assets are of three types:
    • Current Assets: The assets which are likely to convert into cash within a year e.g. book debts and stock of finished goods.
    • Fixed Assets: The assets which generate revenue and last more than one year e.g. building, vehicles, machinery.
    • Intangible Assets: Assets having no physical shape e.g. patents, trademarks and copy-rights.
  • Ask/Offer: The lowest price at which the owner is willing to sell his securities.
  • Audit: The careful review of financial records to verify their accuracy.
  • Auditor: The qualified Chartered Accountant authorised and appointed to conduct an audit.
  • Authorised capital: The amount of share capital with which a company is registered. It is mentioned in the company’s Memorandum of Association.

B

  • Backwardation: The charge paid big a bear speculator to a bill for postponement of settlement of a transaction.
  • Bad debts: The debts which are not recoverable and are written off as a loss.
  • Badla: Carry forward of a transaction from one settlement period to the next without any payment or delivery.
  • Balance of payments: A statement of all money flows in and out of a country.
  • Balance of trade: A statement of a country’s exports and imports during the year.
  • Balance sheet: A statement containing the assets, liabilities and capital of an organisation. It shows the financial position on a specific date.
  • Base price: A security’s price at the beginning of a trading day. It is used to determine the day’s lowest/highest price and the price range.
  • Basket trading: The facility which enables investors to buy/sell in one go all the 30 scripts of Sensex in proportion of their current weights in the Sensex.
  • Bear: A pessimist who expects prices to fall and sells quickly before the value of his holding declines. Bear market: A market situation when share price are continuously falling.
  • Beta: A measurement of the relationship between the price of a security and the price movement of the whole market.
  • Bid: The highest price a buyer is willing to pay for a share. It is the opposite of ask/offer.
  • Blue chip: Shares of a large, well established and financially sound company. It can provide high capital gains.
  • Bond: A long-term promissory note issued by a company or government. It shows the amount of the debt, rate of interest and the due date.
  • Bonus shares: A free allotment of shares out of accumulated reserves to the existing shareholders in proportion to their current holding.
  • Book closure: The period during which a company keeps its register of members closed for updating prior to payment of dividend or issue of new shares/debentures.
  • Book value: The value of an asset recorded in the books of account. It also means the difference between total assets and total liabilities.
  • Brokerage: The commission charged by brokers.
  • Break even point: The number of units that must be sold to generate revenue equal to total expenses. Sale above this point create a profit and sales below it create loss.
  • Budget: A detailed plan expressed in quantitative terms for a specific future period.
  • Bull: One who expects prices to rise and buys in anticipation.
  • Bull market: A market situation in which share prices continuously rise.
  • Business days: The days on which stock markets are open – Monday to Friday, excluding public holidays.
  • Business risk: The risk inherent in the operations of a firm which uses no debt.
  • Buyer: The trading member who has placed on order for the purchase of securities.

C

  • Call: The demand for payment by the company which has issued shares.
  • Call option: The right (not obligation) to buy a particular share at a specified price within the specified time period.
  • Capital budgeting: The process of planning expenditure on fixed assets.
  • Capital gain: The increase in the value of a security.
  • Capital market: The financial market for shares, debentures and long-term debt.
  • Closing price: The price of a security at the end of a trading day.
  • Commercial paper: Short term and unsecured promissory note issued by a large firm with an interest rate below the prime lending rate of commercial banks.
  • Commodity: Products used for commerce and traded on authorized commodity platforms.
  • Convertible security: A preference share, debenture, a bond that can be converted into equity shares at the option of the holder.
  • Consolidation: Business combination of two or more firms.
  • Credit period: The length of time for which credit is granted.
  • Creditor: The individual/organization who owes money on a particular date.

D

  • Debenture: An instrument acknowledging debt raised by a company/corporation.
  • Debtor: An individual/enterprise who owes money, shown as an asset in the balance sheet. Defensive stock: A stock that provides constant dividends even during economic down turn. Depreciation: An expense allowance made for wear and tear of an asset over its estimated useful life.
  • Derivatives: A security whose price is derived from one or more underlying assets such as shares, bonds, commodities, currencies, etc.
  • Diversification: Spreading the investment risk by purchasing shares of different companies operating in different sectors. Also used to refer to a company investing in several related or unrelated business.
  • Dividend: A part of the company’s earning paid to shareholders.
  • Devaluation: Reducing the value of a currency in relation to other currencies, decided by the government.
  • Disinvestment: Selling a part of the share holding of a public enterprise to private sector.

E

  • E-commerce: Doing business transactions over the internet.
  • Economic activity: Any activity undertaken to earn money.
  • Equity capital: Funds provided by holders of equity shares.
  • Equity: Equity capital, free reserves, retained earnings and preference capital.
  • Exchange rate: The rate at which one currency can be purchased for another currency. Ex-dividend: Shares on which dividend declared after their purchase is not payable.

F

  • Foreign company: A company incorporated outside India but having business operations in India.
  • Forward trading: Buying and selling without the intention of delivery and payment, aim is to earn from fluctuations in price.
  • Futures: The right to buy or sell at a future date and at the specified price.
  • Face value: The price at which a share/bond/debenture is issued. Also known as par value.
  • Financial instrument: A written document sharing an agreement or a transaction e.g. share, debenture, cheque, etc.
  • Financial intermediary: One who acts as a link between buyers and sellers of securities, e.g. share brokers, banks.

G

  • Goodwill: The estimated money value of a firm’s reputation.
  • Government bonds: A security issued by a government to raise debt.
  • Government company: A Company in which government owns 51 per cent or more of the share capital.

H

  • Hedge: A strategy used to minimise the risk and maximize the return on investment.
  • Holding period: The time period during which an individual/corporation holds/owns an asset. This period is considered while pledging the asset as collateral.

I

  • Income stock: A security that offers dividend higher than that on common stock. It has a solid record of dividend payments.
  • Index: A statistical measure of change in the security market/economy. It is usually calculated as a percentage change in the base value overtime.
  • Initial public offer (IPO): A company’s first issue of shares to general public.
  • Internet trading: Buying and selling securities over the internet. SEBI approved it in January 2000. Interim dividend: A dividend declared prior to the close of the financial year.

J

  • Joint venture: A partnership between two or more independent firms resulting in the creation of a third enterprise.
  • Journal: Datewise records of transactions, a book of original entry.

L

  • Lame duck: A speculator struggling to honour his commitment due to unexpected fluctuations in the price of a security on the stock market.
  • Lease: A legal right for the use of an asset.
  • Ledger: A book of account in which entries are posted from the Journal into various accounts. Lien: A legal claim to property until repayment of debt.
  • Limit order: An order to buy or sell a share at a specified price. It specifies the minimum price the seller is willing to accept or a maximum price the buyer is willing to pay.
  • Liquidation: Piecemeal sale of the assets of a division of the company.
  • Listed stock: The shares of a company that are eligible for trading on the stock exchange.

M

  • Margin trading: Buying securities on a stock exchange after keeping a deposit with the broker. Market capitalization: The total market value of a company’s out standing shares.
  • Minimum subscription: The minimum amount of share capital a company must receive in cash before making allotment of shares. It is equal to 90 per cent of issued capital.
  • Money market: Market for raising short-term funds.
  • Mutual funds: A pool of money managed by experts for investing in shares, debentures and other securities. .

N

  • Nominee director: A director nominated by the financial institution from which the company has raised a loan.

O

  • Odd lot: Shares less than the trading lot and held by a small investor.
  • One sided market: A market having only potential buyers or only potential sellers.
  • Out-of-the money (OTM): In case of call options, it means the share price is below the strike price. In case of put options, it means the share price is above the strike price.

P

  • Par value: The value of a share printed on the share certificate.
  • Portfolio: Various types of securities of different companies held by an investor.
  • Preliminary expenses: Expenses incurred for the formation of a company.
  • Pre-opening session: Time duration from 9.00 am to 9.15 a.m. during which order entry, modification and cancellation are done before the start of trading on stock exchange.
  • Price earning (PIE) ratio: The market price of a share divided by the earning per share. Prospectus: A document issued by a Company to sell shares/debentures to the general public.
  • Proxy: A written authority given by a member of a company to some one to attend the meeting on his/her benefit.

R

  • Right shares: Equity shares issued by a company to the existing shareholders in proportion to their current holding.

S

  • Securities: A transferable certificate of ownership of shares, debentures, etc.
  • Share: A part in the share capital of a company.
  • Stock: Fully paid shares of a company.
  • Strike price: The price at which the shareholder can buy (in case of call option) or sell (in case of put option) a security.
  • Stock split: Splitting one share into several shares to increase the availability of existing shares e.g., splitting a share with face value of 100 into 10 shares with face value of Rs. 10 each.

T

  • Thin market: A market with a few bids to buy or offer to sell, the prices in such market vary highly. Trading session: The time period during which the stock market is open for trading.

U

  • Underwriting: Guarantee to subscribe to an issue of shares in case public does not subscribe to it.

W

  • Working capital: The capital used in day-to-day business activities, also called circulating capital.

Y

  • Yield: Percentage return on investment in case of shares it is calculated by dividing the annual dividend with the current price of the share.
  • Yield-to-call: The rate of return earned on a bond when it is called before the date of maturity.

Z

  • Zero coupon bond: A bond sold at a discount below par but paid back at face value. No interest is payable on it.

CA Foundation Business Economics Study Material – Introduction to Demand

CA Foundation Business Economics Study Material Chapter 2 Theory of Demand and Supply – Introduction to Demand

Meaning of Demand

  • In ordinary speech, the term demand is many times confused with ‘desire’ or ‘want’.
  • Desire is only a wish to have any thing.
  • In economics demand means more than mere desire.
  • Demand in economics means an effective desire for a commodity ie. desire backed by the ‘ability to pay’ and ‘willingness to pay’ for it.
  • Thus, demand refers to the quantity of a good or service that consumers are willing and able to purchase at different prices during a period of time.
  • Thus, defined, the term demand shows the following features:
    1. Demand is always with reference to a PRICE.
    2. Demand is to be referred to IN A GIVEN PERIOD OF TIME.
    3. Consumer must have the necessary purchasing power to back his desire for the commodity.
    4. Consumer must also be ready to exchange his money for the commodity he desires.
  • E.g. Mr. A’s demand for sugar at Rs. 15 per kg. is 4 kgs. per week.

Determinants of Demand

For estimating market demand for its products, a firm must have knowledge about—
(a) the determinants of demand for its product, and
(b) the nature of relationship between demand and is determinants.

The various factors on which the demand for a product/commodity depends are as follows:—

Price of the commodity:

  1. Other things being equal, the demand for a commodity is inversely related with its price.
  2. It means that a rise in price of a commodity brings about fall in its demand and vice versa.
  3. This happens because of income and substitution effects.

Price of the related commodities:

  1. The demand for a commodity also depends on the prices of related commodities.
  2. Related commodities are of two types namely—
    • Substitutes or competitive goods, &
    • Complementary goods.
  3. Substitute goods are those goods which can be used with equal ease in place of one another.
  4. E.g. Essar Speed Card and Airtel Magic Card; Coke and Pepsi; ball pen and ink pen; tea and coffee; etc.
  5. Demand for a particular commodity is affected if the price of its substitute falls or rises.
  6. E.g. If the price of Airtel Magic card falls, its demand will increase and demand for Essar Speed Card would fall and vice versa.
  7. Thus, there is a POSITIVE RELATIONSHIP between price of a commodity and demand for its substitutes.
  8. Complementary good are those goods whose utility depends upon the availability of both the goods as both are to be used together.
  9. E.g. a ball pen and refill; car and petrol; a hand set and phone connection; a tonga and horse, etc.
  10. The demand for complementary goods have an INVERSE RELATIONSHIP with the price of related goods.
  11. E.g. If the price of Scooters falls, its demand will increase leading to increase in demand for petrol.

Income of the consumers

  1. Other things being equal, generally the quantity demanded of a commodity bear a DIRECT RELATIONSHIP to the income of the consumer ie. with an increase in income, the demand for a commodity rises.
  2. However, this may not always hold true. It depends upon the class to which commodity belongs ie. necessaries or comforts and luxuries or inferior goods:
    • Necessaries (E.g. Food, clothing and shelter). Initially, with an increase in the in-come, the demand for necessaries also rises upto some limit. Beyond that limit, an increase in income will leave the demand unaffected.
    • Comforts and Luxurious (E.g. Car; Air-Conditioners; etc.) Quantity demanded of these group of commodities have a DIRECT RELATIONSHIP with the income of the consumers. As the income increases, the demand for comforts and luxuries also increases.
    • Inferior goods (E.g. Coarse grain; rough cloth; skimmed milk; etc.). Inferior goods are those goods for which superior substitutes are available Quantity demanded of this group of commodities Have an INVERSE RELATIONSHIP with the income of the consumer. E.g. A consumer starts consuming full cream milk (normal good) in place of toned milk (inferior good) with an increase in income.

Therefore, it is essential that business managers must know—

  • the nature of good they produce,
  • the nature of relationship between the quantities demanded and changes in consumer’s income, and
  • the factors that could bring about changes in the incomes of the consumers.

Tastes and Preferences of the consumers

  • Tastes and preferences of consumers generally change over time due to fashion, advertisements, habits, age, family composition, etc. Demand for a commodity bears a direct relationship to those determinants.
  • Modern goods or fashionable goods have more demand than the goods which are of old design and out of fashion.
    E.g. People are discarding Bajaj Scooter for say Activa Scooter.
  • The demand of certain goods is determined by ‘bandwagon effect’ or ‘demonstration effect’. It means a buyer wants to have a good because others have it. It means that an individual consumer’s demand is conditioned by the consumption of others.
  • Taste and preferences may also undergo a change when consumer discover that consumption of a good increases his PRESTIGE. E.g. Diamonds, fancy cars, etc.
  • A good loses its prestige when it becomes a commonly used good. This is called ‘snob effect’.
  • Status seeking rich people buy highly priced goods only. This form of ‘conspicuous consumption’ or ‘ostentatius consumption’ is called ‘VEBLEN EFFECT’ (named after American economist THORSTEIN VEBLEN)
  • Tastes and preferences of people change either due to external causes or internal causes.
  • Therefore, knowledge about tastes and preferences is important in production planning, designing new products and services to suit the changing tastes and preferences of the consumers.

Other Factors. Other things being equal demand for a commodity is also determined by the following factors:—

  1. Size and composition of Population:
    • Generally, larger the size of population of a country, more will be the demand of the commodities.
    • The composition of the population also determines the demand for various commodities.
      E.g. If the number of teenagers is large, the demand for trendy clothes, shoes, movies, etc. will be high.
  2. The level of National Income and its Distribution:
    • National Income is an important determinant of market demand. Higher the national income, higher will be the demand for normal goods and services.
    • If the income in a country is unevenly distributed, the demand for consumer goods will be less.
    • If the income is evenly distributed, there is higher demand for consumer goods.
  3. Sociological factors:
    • The household’s demand for goods also depends upon sociological factors like class, family background, education, marital status, age, locality, etc.
  4. Weather conditions:
    • Changes in weather conditions also influence household’s demand.
      E.g. – Extraordinary hot summer push up the demand for ice-creams, cold drinks, coolers etc.
  5. Advertisement:
    • A clever and continuous campaign and advertisement create a new type of demand.
      E.g. Toilet products like soaps, tooth pastes, creams etc.
  6. Government Policy:
    • The government’s taxation policy also affects the demand for commodities.
    • High tax on a commodity will lead to fall in the demand of the commodity.
  7. Expectation about future prices:
    • If consumers expect rise in the price of a commodity in near future, the current demand for the commodity will increase and vice versa,
  8. Trade Conditions:
    • If the country is passing through boom conditions, demand for most goods is more.
    • But during depression condition, the level of demand falls.
  9. Consumer-credit facility and interest rates:
    • If ample credit facilities with low rates of interest is available, there will be more demand specially of consumer durable goods like scooters, LCD /LED televisions, refrigerators, home theatre, etc.

Demand Function

Mathematical/symbolic statement of functional relationship between the demand for a product (the dependent variable) its determinants (the independent variables) is called demand function

Dx = f (Px, M, Ps ; Pc, T, A)

Where—
Dx= quantity demanded of product
Px = the price of the product
M = money income of the consumer
Ps = the price of its substitute
Pc = the price of its complementary goods
T = consumer’s tastes and preferences
A = advertising effect measured through the level of advertisement expenditure.

CA Foundation Business Economics Study Material Chapter 1 Nature and Scope of Business Economics – MCQs

CA Foundation Business Economics Study Material Chapter 1 Nature and Scope of Business Economics – MCQs

MULTIPLE CHOICE QUESTIONS

1. Economics is a science because
(a) Systematised study
(b) Scientific laws
(c) Has its own methodology
(d) All the above

2. Positive statements concern what is; normative statements concern—
(a) What was
(b) What is the normal situation
(c) What will be
(d) What ought to be

3. Which of the following statements are positive statements?
(i) India is overpopulated.
(ii) Agricultural income should be taxed.
(iii) Service-class people should be exempted from income tax
(vi) There is tremendous tax evasion in India.
(a) i and ii
(b) i and iii
(c) i and iv
(d) iii and iv

4. The central problems of an economy arises because of—
(a) Unlimited wants
(b) Scarce resources having alternative uses
(c) Limited wants and unlimited resources
(d) Both (a) and (b)

5. The central problems relating to allocation of resources are—
(a) What to produce?
(b) How to produce?
(c) For whom to produce?
(d) All the above.

6. The problem of ‘What to produce’ relates to—
(a) The distribution of produced goods and services
(b) The technique of production to produce good
(c) The distribution of income among factor owners
(d) None of these

7. Micro economics deals with—
(a) Inflation in the country
(b) The economic behaviour of an individual unit
(c) The per capita income
(d) The problems of poverty and unemployment in the country

8. The objective of macro-economics is to study about—
(a) Problems, principles and policies relating to full employment of available resources
(b) Problems, Principles and policies relating to optimum allocation of resources
(c) Growth of resources
(d) Both a and c

9. Micro economics covers the study of—
(i) Consumer’s behaviour
(ii) Producer’s equilibrium
(iii) Fiscal system of an economy
(iv) Factor pricing
(a) i and iii (b) ii and iv
(c) i, ii and iii (d) i, ii and iv

10. Macro-economics is also known as—
(i) Method of Lumping
(ii) Price Theory
(iii) General equilibrium analysis
(iv) Aggregative Economics
(a) i and ii only
(b) iii and iv only
(c) i, iii and iv only
(d) ii, iii and iv only

11. Which of the following is not correct?
(a) Micro and Macro economics are complementary to each other
(b) Every macro-economic problem requires micro-economic analysis for its proper understanding
(c) Micro-economic behaviour can be added-up to derive macro-economic behaviour.
(d) What is macro from the national angle is micro from world angle

12. A theory may contain all but one of the following—
(a) An unorganised collection of facts about the real world!
(b) A set of definitions of the terms used.
(c) A set of assumptions
(d) One or more hypotheses

13. Positive economics deals with—
(a) What is
(b) What ought to be
(c) Both ‘a’ ‘b’
(d) None of these

14. Micro economics does not cover—
(a) Consumer behaviour
(b) Factor Pricing
(c) General price level
(d) Product Pricing

15. Find the odd—
(a) Normative economics is concerned with welfare propositions.
(b) Normative economics is prescriptive in nature.
(c) Normative economics is regulatory in nature.
(d) Economic laws are hypothetical.

16. A mixed economy to solve its central problems relies on—
(a) Economic planning
(b) Price mechanism
(c) Price fixing
(d) Both ‘a’ and ‘b’

17. In a socialist economy, the basic force of economic activity is profit. This statement is—
(a) Correct
(b) Incorrect
(c) Partially correct
(d) None of these

18. The interference of the government is very limited in—
(a) Socialist economy
(b) Capitalist economy
(c) Mixed economy
(d) All the above.

19. Both private and public sectors exist side by side in—
(a) China
(b) U.S.A.
(c) India
(d) Russia

20. In a competitive economy, the uncrowned king is—
(a) Government
(b) Producer
(c) Consumer
(d) Seller

21. Wastes of competition are found in—
(a) Capitalist economy
(b) Socialist economy
(c) Mixed economy
(d) None of these

22. A dual system of pricing exists in—
(a) Capitalist economy
(b) Socialist economy
(c) Mixed economy
(d) None of these

23. One of the important features of capitalist economy is—
(a) Economic planning
(b) Price mechanism
(c) Economic equalities
(d) Social welfare

24. ‘A government deficit will reduce unemployment and cause an increase in prices.’ This statement is—
(a) Positive
(b) Normative
(c) Incomplete
(d) None of these

25. Positive economics remains strictly neutral towards ends. This means that—
(a) Positive economics study the facts as they are
(b) Positive economics is prescriptive in nature
(c) Positive economics is based on ethical, philosophical and religious beliefs
(d) Only (a) and (b)

26. “During the boom periods when aggregate demand, national income and prices are high, entrepreneurs tend to make high profits”. This statement shows—
(a) Effect of micro-economic variables on macro variables
(b) Effect of macro-economic variables on micro variables
(c) Inter-dependence of micro and macro-economics
(d) Both (b) and (c)

27. Social insurance, sickness benefits, old age pension, etc are some social benefits provided by—
(a) State in capitalist economy
(b) State in socialist economy
(c) State in mixed economy
(d) Both (b) and (c)

28. In a capitalistic economy what to produce depends on—
(a) governments is policy
(b) consumer’s preference
(c) profits of firm
(d) none of these

29. The economy in which the government allows freedom of action of all economic units is essentially—
(a) a socialist economy
(b) a mixed economy
(c) a capitalistic
(d) none of the these

30. Which of the following is not correct about capitalistic system—
(a) Too much of waste due to cut throat competition
(b) There is right of private property.
(c) Conditions are not favourable for equitable distribution of wealth.
(d) There is central planning authority.

31. Which of the following is not the feature of socialist economy ?
(a) Economic planning
(b) Social welfare
(c) Private ownership of productive resources
(d) Economic equalities

32. Micro economics is also known as—
(a) Price theory
(b) Slicing method
(c) Product theory
(d) Both (a) and (b)

33. Economics is an art as—
(a) it teaches us to do
(b) it provides practical solutions to various economic problems.
(c) it is practice of knowledge
(d) all the above

34. Study of the problem of poverty denotes that economics is—
(a) a science
(b) an art
(c) both a science and an art
(d) neither a science nor an art

35. Framing suitable policies to solve inequalities of income denotes that economics is—
(a) a science
(b) an art
(c) both a science and an art
(d) neither science nor an art

36. Study of unemployment problem and then framing suitable policies to reduce the extent of unemployment shows that economics is—
(i) Both a science and an art
(ii) Neither a science nor an art
(iii) Positive science
(iv) Normative science
(a) i and iii only
(b) ii and iv only
(c) i, iii and iv
(d) ii, iii and iv

37. _____ economics explains cause and effect relationship between economic phenomena
(a) Positive
(b) Normative
(c) Empirical
(d) Applied

38. Positive economics concerns .
(a) what should be
(b) what is
(c) both (a) and (b)
(d) what ought to be

39. Normative economics is in nature
(a) modern
(b) descriptive
(c) prescriptive
(d) none of the above

Q. 40 to Q. 43 are based on the following conversation
Ram : “Rise in prices of goods have made it difficult to make two ends meet”
Shy am : “Yes, the cost of cultivation too has increased very much”.
Raghu : “Government should take steps to curb the price rise and provide relief to common man”.
Bhola : “Yes, he government should deal strictly on hoarders and black marketers”.

40. In the above conversation whose statements shows positive aspect of Economics?
(a) Ram
(b) Shyam
(c) Both (a) and (b)
(d) Bhola

41. In the above conversation whose statements shows normative side of economics
(a) Shyam
(b) Raghu
(c) Bhola
(d) Both (b) and (c)

42. Shyam’s statement in the above conversation shows—
(a) What is
(b) What can be
(c) What ought to be
(d) What will be

43. Bhola’s statement in the above conversation shows—
(a) What is
(b) What should be the things
(c) What was
(d) None of the above

44. As compared to other economic systems, inequalities of incomes is relatively less in economic system
(a) Capitalist
(b) Socialist
(c) Mixed
(d) None of the above

45. Price-mechanism is an important feature of –
(i) Market economy
(ii) Regulated economy
(iii) Mixed economy
(iv) Capitalist economy
(a) i and ii only
(b) iii and iv only
(c) i and iii only
(d) i and iv only

46. Consumers and produces make their choices based on the market forces of demand and supply in—
(a) Socialist (Command) Economy
(b) Mixed Economy
(c) Capitalist Economy
(d) Closed Economy

47. The problem of what goods and services are produced and how much, is covered by the general term—
(a) resource allocation
(b) choice of technique of production
(c) distribution
(d) macro-economics

48. Business Economics is generally in nature.
(a) normative
(b) positive
(c) neutral
(d) descriptive

49. Capital intensive technique would be chosen in a
(a) labour surplus economy where the relative price of capital is lower
(b) capital surplus economy where the relative price of capital is lower
(c) developed economy where technology is better
(d) developing economy where technology is poor

50. Which of the following statement is incorrect?
(a) Business economics is a normative in nature
(b) Business economics is closely related with statistics
(c) Business economics only considers micro variables
(d) Business economics is also called Managerial economics

51. All of the following are within the scope of Business Economics except
(a) Capital Budgeting
(b) Risk Analysis
(c) Business Cycles
(d) Accounting Standards

52. Which of the following is considered as a disadvantage of allocating resources in a capitalist economy?
(a) Income will tend to be unevenly distributed
(b) People do not get goods of their choice
(c) Men of initiative and enterprise are not rewarded
(d) Profits will tend to be low

ANSWERS

ca-foundation-business-economics-study-material-chapter-1-nature-and-scope-of-business-economics-mcqs