Accounting-Finance

Marketing: Meaning And Features

2020-06-06T06:23:00.030-07:00

Concept And Meaning Of Marketing

Let's try to understand the meaning of marketing with the help of some definitions by different scholars and writers.

Old Concept Of Marketing

Definition Of Marketing By Professor Pyle

" Marketing comprises both buying and selling activities."

Prof. Pyle defines that marketing means only buying and selling or exchange of goods and services.

Definition By American Marketing Association (1960)

" Marketing is the performance of the business activities that direct the flow of goods and services from producers to consumers or users."

In 1960 American Marketing Association defined marketing as selling of products and services.

Therefore, old concept of marketing has defined marketing in very narrow sense. It limits marketing within the exchange of goods and services only.

Modern Concept Of Marketing

Definition Of Marketing By American Marketing Association (985)

"Marketing is the process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchanges satisfying individual and organizational objectives."

This is a new definition of marketing revised by American Marketing Association in 1985. It defines marketing in broad sense and gives emphasis on planning, pricing, promotion and customer satisfaction.

Definition By Harry Z Hansen

" Marketing is the process of discovering and translating consumers' want into product and service specifications, and then in turn helping making it possible for more and more consumers to enjoy more these products and services."

According to Harry Z Hansen, marketing means identifying customers wants and satisfying them by providing goods and services according to their needs.

Therefore, in the modern context, marketing is not just buying and selling of products, it is the process of identifying potential customers, discovering their needs, and supplying products and services to satisfy them.

Features Of Marketing

The main features of marketing can be described as follows:

1. Need Satisfaction

The main purpose of marketing is to maximize profit by satisfying the needs of customers. So, companies try to provide goods and services according to the needs and wants of customers.

2. Several Activities

Marketing is not just producing and selling goods, it includes various activities such as producing, packaging, pricing, promotion, transportation etc.

3. Continuous Activity

Marketing is never ending process. All marketing activities (planning, production, promotion, distribution etc.) are performed regularly to achieve the goals and objectives of the business.

4. Systematic Process

Marketing is a systematic process that includes identifying potential customers, discovering their wants, transforming their wants into products and services and satisfying them by transferring the ownership (selling the products).

5. Exchange Process

Transfer of ownership is done through exchange (buying and selling) of products and services. Therefore, marketing can be defined as exchange process.

6. Goal Oriented Process

Marketing is a goal oriented process. The goal may be profit maximization or wealth maximization.

7. Economic Function

Marketing is an economic function because it is related to buying and selling of goods with the motive of earning profit.

8. Dynamic Process

Marketing strategies are changed according to the buyers behaviors. It should be changed according to the internal and external business environment also. So, it is a dynamic process.

Difference Between Systematic Risk And Unsystematic Risk

2017-12-18T03:54:00.015-08:00

Major differences between systematic and unsystematic risk are described as follows:

1. Meaning

Systematic Risk: It is a part of total market risk which arises due to external factors like economic factors, political factors and sociological factors.

Unsystematic Risk: It refers to the part of risk which is associated and arises due to the internal factors within the company.

2. Nature

Systematic Risk: It is non-diversifiable risk, so it cannot be reduced or controlled by the management.

Unsystematic Risk: It is diversifiable risk, so it can be reduced or controlled by the management.

3.Factors

Systematic Risk: It occurs due to the external factors.

Unsystematic Risk: It occurs due to internal or organizational factors.

4. Affects

Systematic Risk: It affects the whole market and the economy.

Unsystematic Risk: It affects only a specific industry or business organization.

5. Measurement

Systematic Risk: It is measured by the help of security's Beta. Beta is the indicator of systematic risk.

Unsystematic Risk: There is no such tool to indicate or measure this type of risk. It is calculated by deducting systematic risk from the total market risk.

6. Sources

Systematic Risk: Market risk, interest rate risk, purchasing power risks etc are the major sources of this type of risk.

Unsystematic Risk: Business risk, financial risk, insolvency risk are the major sources of unsystematic risk.

7. Examples

Systematic Risk: Change in interest rate, inflation, price changes, high unemployment rate etc are the common examples of this types of risk.

Unsystematic Risk: High labor turnover, high operational cost, strike in the company etc. are the examples of unsystematic risk.

Difference Between Investment And Speculation

2017-12-17T23:59:00.010-08:00

Major differences between investment and speculation are as follows:

1. Meaning

Investment: It is a purchase of assets with the expectation of regular return.

Speculation: it is a financial transaction with an expectation of capital gain or substantial profit.

2. Planning

Investment: It is a long term planning (at least one year or more).

Speculation: It is a short term plan (only for few months).

3. Risk Disposition

Investment: It involves only modest risk.

Speculation: It involves higher level of risk.

4. Expected Rate Of Return

Investment: It expects for a modest rate of return because of moderate risk.

Speculation: Due to higher level of risk involved, it expects higher rate of return.

5. Leverage

Investment: Investor's own funds and property is used.

Speculation: Generally borrowings from others are used.

6. Income Type

Investment: Income is certain and stable in investment.

Speculation: Income is uncertain and unstable in speculation.

7. Behavior

Investment: Investor possess caring and cautious behavior.

Speculation: Speculator possess careless and daring behavior.

Reasons For Investment

2017-12-12T23:44:00.016-08:00

Main reasons for investing fund are as follows:

1. For Supplementary Income

This is one of the main reason for investing the fund. Investment helps to grow money which helps to supplement the income.

2. To Minimize Tax Liabilities

Investment in life insurance, retirement fund, citizen investment fund etc. offer tax rebate. This minimizes tax liabilities and investors may enjoy tax benefit.

3. Protection From Inflation

Invest is necessary to get protection from inflation because idle fund or money reduce its value over the passage of time. Investment helps to earn nominal rate of return and maintain the purchasing power.

4. Starting Or Expanding Business

Many people invest money to start a new business or to expand their existing business for higher income.

5. Excitement And Hobby

Some people invest their money for excitement and hobby also by following other people.

Characteristics Of Investment

2017-11-27T03:35:00.012-08:00

Main features or characteristics of investment are as follows:

1. Risk Factor

Every investment contains certain portion of risk. It is a key feature of investment which refers to loss of principal, delay in payment of interest and capital etc. Most investors prefer to invest in less riskier securities.

2. Expectation Of Return

Return expectation is the main objective of investment. Investors expect regularity of high and consistent income for their capital.

3. Safety

Investors expect safety for their capital. They desire certainty of return and protection of their investment or principal amount.

4. Liquidity

Liquidity means easily sale or convert the capital or investment into cash without any loss. So, most investors prefer liquid investments.

5. Marketability

It is another feature of investment that they are marketable. It means buying and selling or transferability of securities in the market.

6. Stability Of Income

Investors invest their capital with high expectation of income. So, return on their investment should be adequate and stable.

Difference Between Direct Costs And Indirect Costs

2017-11-27T00:07:00.013-08:00

Major differences between direct costs and indirect costs are as follows:

1. Meaning

Direct Cost: Costs associated directly with the production of specific products and can be easily identifiable.

Indirect Cost: Cost associated in the production process but cannot easily be identified.

2. Traceable

Direct Cost: It can be easily traced and computed.

Indirect Cost: It cannot be identified and traced easily.

3. Per Unit Cost

Direct Cost: It can be calculated and converted into per unit cost of the product.

Indirect Cost: It cannot be converted into per unit cost.

4. Aggregate

Direct Cost: Aggregate or total direct cost is called prime cost.

Indirect Cost: Aggregate of total indirect cost is known as overheads.

5. Vary

Direct Cost: It varies or change proportionately according to the change in output.

Indirect Cost: It does not varies proportionately according to the output level.

6 Examples

Direct Cost: Direct materials cost, direct labor cost and other direct expenses.

Indirect Cost: Indirect materials cost, indirect labor cost and other indirect expenses.

Difference Between Variable Costs And Fixed Costs

2017-11-26T23:16:00.010-08:00

Major differences between variable costs and fixed costs are as follows:

1.Meaning

Variable Cost: Costs which increase or decrease with the change in output or activity.

Fixed Cost: Costs which don not increase or decrease with the change in volume or activity.

2. Nature

Variable Cost: It is influenced by the volume of production.

Fixed Cost: It influenced by the passage of time.

3. Behavior

Variable Cost: There may be no variable cost in the absence of production or activity.

Fixed Cost: It is always positive even if the production is stopped.

4. Relation With Output

Variable Cost: It is directly related with the activity or production of the firm.

Fixed Cost: It is constant cost, so it does not have any relation with productivity of the firm.

5. Controlling

Variable Cost: It is controllable cost so it can be controlled by managerial decision.

Fixed Cost: Fixed costs cannot be controlled easily by managerial decisions.

Meaning And Characteristics Of Variable Costs And Fixed Costs

2017-11-26T22:30:00.007-08:00

Variable Costs

The variable costs that vary or change in the direct proportion to and in the same direction as the change in the volume of activity or output are called direct variable costs. These variable costs directly increase or decrease with the change in the volume of output or activity. As a result, the higher the volume of output produced or activity performed, the higher is the total variable costs thereto, or vice versa. Some important characteristics of variable costs are as follows:

* Total variable costs behave (change or vary) proportionately with the change in the volume of activity or output.

* Unit variable costs remain unchanged or constant with the change in the volume of activity or output.

* Variable costs are controllable because they are influenced by managerial decisions.

Fixed Costs

The costs that remain fixed irrespective of the change in the volume of activity or output are called fixed costs. If any cost remains constant in total at any level of activity within the relevant range, it is called the fixed cost. Fixed cost do not vary or change with output or productive activity. They accrue primarily with the passage of time and therefore, they are time expenses. Fixed expenses are incurred by the holding of assets and other factors of production. Therefore, fixed expenses are also called capacity costs. Some characteristics of fixed costs are as follows:

* Fixed costs do not change or stay constant at any level of output.

* Per unit fixed costs decrease if volume of output is increased and vice versa.

* Generally fixed costs are uncontrollable costs. They can not be influenced by managerial decisions.

Objectives Of Financial Accounting

2017-11-26T04:05:00.007-08:00

Main objectives of financial accounting can be described as follows:

1.Systematic Recording Of Financial Transactions

Since human memory is short, systematic recording of financial transactions that took place in the past is essential. Therefore, one important objective of financial is to maintain systematic and permanent records of the financial transactions in a set of books called journal and ledger.

2. Revealing The Financial Position Of The Firm

The soundness of financial position of a firm ensures its survival and growth. Therefore financial accounting aims at revealing the soundness of its financial position by preparing the balance sheet.

3. Ascertaining The Result Of Business Operations

Profit is the main motive of every business firm. That is the result of its operations carried on throughout a financial year. Therefore, another important objective of financial accounting is to ascertain the result of business operations in terms of profit or loss by preparing income statement of the firm.

4. Reporting Past Performance And Future Prospect

The shareholders of the firm want to ensure security and growth in the value of their investment. Therefore, financial accounting seeks to report to the shareholders about the firm's past performances and future prospect.

Importance Of Management Accounting

2017-11-25T02:38:00.008-08:00

Need and importance of management accounting can be described as follows:

1. Goal Determination

Management accounting determines specific goals and objectives of the business organization. It sets future targets of the organization.

2. Planning

Proper planning is necessary to achieve business goals and objectives. Management accounting helps to make plans and policies through which desired goals can be achieved or targets can be meet.

3. Controlling

Effective controlling system is needed to achieve desired business targets and objectives. Management accounting applies variance analysis technique to compare actual result with desired or standard performance. Corrective actions are taken if variation found between actual performance and the standard set by the organization.

4. Increase Efficiency

Management accounting helps to increase business efficiency and productivity by setting targets to different sections and departments. Their efficiency is regularly measured by using different tools and techniques.

5. Maximization of Profit

Management accounting helps to maximize profit by reducing wastage and controlling excess expenses. It tries to improve productivity and efficiency in minimum cost.

Difference Between Cost Accounting And Management Accounting

2017-11-25T00:25:00.009-08:00

Major differences between cost accounting and management accounting are as follows:

1. Meaning

Cost Accounting: Process of collecting, tracking, analyzing and ascertaining the cost of the product. It provides cost data regarding the product.

Management Accounting: It Provides financial and non financial data or information to the top level management.

2. Information

Cost Accounting: It provides quantitative (which can be measured in monetary term) information about the product or services.

Management Accounting: It deals with both quantitative and qualitative (cannot be measured in monetary term) information and data.

3. Objective

Cost Accounting: To track the cost data and to help the management in cost control and cost reduction process.

Management Accounting: It helps the management in future planning, policy making, coordinating and controlling by providing financial and non-financial information.

4. Scope

Cost Accounting: It only deals with the cost data. So, its scope is not wide.

Management Accounting: It has a wider scope than cost accounting. It deals with financial and non-financial data. It also deals with financial accounting, economics and mathematics also.

5. Nature

Cost Accounting: It deals with past and present cost data.

Management Accounting: It focuses on present data as well as future plan and projection.

6. Interdependancy

Cost Accounting: It can be practiced without the help of management accounting.

Management Accounting: In the absence of cost accounting management accounting cannot be practical.

7. Procedure

Cost Accounting: It follows specific rules, technique and procedure.

Management Accounting: It does not follow any specific rules and procedure.

8. Planning

Cost Accounting: It focuses on short term planning.

Management Accounting: It stresses on both short term planning and long term planning.

Objectives Of Cost Accounting

2017-11-24T08:07:00.013-08:00

Main objectives of cost accounting can be described as follows:

1. Ascertainment Of Cost

This is the key objective of cost accounting to track and analyze the per unit cost of the product produced by the company. It helps to ascertain cost of each activity such as process, operation, job etc.

2. Fix Selling Price

Cost accounting provides base for determination of selling price of company's product by ascertaining the cost of each product. It helps the management to fix the selling price of products and services.

3. Cost Control

Cost accounting helps the organization to control the cost of production by taking necessary steps to reduce wastage of materials, time and expense while carrying out the operation.

4. Assisting In Decision Making

Cost accounting helps management in decision making such as make or buy decision, drop or continue decision, future expansion policies etc. It helps to make a choice out of two or more courses of action.

5. Ascertainment Of Profit

Cost accounting helps in tracking and ascertaining profitability of the product by preparing profit and loss account and balance sheet periodically.

6. Formulating Policies

Cost accounting plays important role to formulate policies of the organization. It provides necessary information and data to the top level management which are essential for framing marketing policies of the company.

7. Basis Of Financial Statement

Cost accounting is the foundation for the preparation of different financial statements (profit and loss account, balance sheet, trial balance etc.) of the company.

Problems Faced By Women Entrepreneurs

2015-07-04T23:08:00.007-07:00

Women entrepreneurs have to face the following Problems:

1. Lack Of Adequate Capital

Generally, women entrepreneurs use their savings and personal property to start a new venture. Due to their poor access to external financial resources, they face the problem in raising capital.

2. Poor Business Relations

In male-dominated groups, it is very hard for the women entrepreneurs to to develop business relations. Therefore, they find limited business opportunities.

3. Lack Of Skill

Generally, women possess administrative skills and lack manufacturing and technical skills. Therefore, their skills and experience limits them to service-related ventures only.

4. Family Pressure

Women entrepreneurs suffer from family pressure. They have to devote their time for household works and for children. This limits them to use time for new venture.

5. Low Mobility

Women tend to be less mobile than men by nature. Due to low mobility, they may lose various business opportunities.

6. Other Difficulties

Women entrepreneurs have to face various other problems such as legal constraints, lack of infrastructure, shortage of raw materials, stiff competition. etc.

Functions Of Women Entrepreneurs

2015-06-07T01:40:00.012-07:00

Following Functions Are Performed By Women Entrepreneurs

1. Creating New Venture

Women entrepreneurs identify the opportunities, evaluate them and select the best opportunity. They convert the opportunity into new venture. Women entrepreneurs are imaginative in nature and they can develop ideas about the new venture.

2. Risk Bearing

Every business includes some portion of risk. But women entrepreneurs have risk taking capacity. They calculate different types of risks such as financial risk, social risk, psychological risk etc. They handle risks by gathering information.

3. Innovation

This is another major function of women entrepreneurs. They convert their ideas into innovations to meet market demands by the help of research and development facilities.

4. Management

Women entrepreneurs believe in hard work. They directly engage in the management. They take part in planning, coordinating and controlling. They motivate and provide leadership to the employees.

Difference Between Entrepreneur And Intrapreneur

2015-03-24T02:03:00.007-07:00

The differences between entrepreneur and intrapreneur are as follows:

1. Dependency

Entrepreneur: He is fully independent. He does not work for others and his own boss.

Intrapreneur: He depends on corporate owner. He works for corporation under defined rules and regulations.

2. Capital/ Investment

Entrepreneur: He manages required capital himself. He raises fund for new business.

Intrapreneur: He does not need to manage required fund because corporation raises capital for the business.

3. Risk Bearing

Entrepreneur: He bears 100% business risk. He risks own money.

Intrapreneur: He does not bear full risk of the business, He risks others money.

4. Primary Motive

Entrepreneur: Primary motive of entrepreneur is to be independent, self-satisfaction and earn monetary reward.

Intrapreneur: He has the motive of advancement and promotion with fixed salary.

5. Time Bound

Entrepreneur: He does not follow strict timetable. It may take several years for the growth of the business.

Intrapreneur: He is bounded by the corporate timetable.

6. Mind-set

Entrepreneur: He is guided by the principle of ' Problems provide opportunities'.

Intrapreneur: He thinks that the problems are threats for him and his corporation

E-commerce Features

2014-08-03T00:13:00.005-07:00

The main features of e-commerce can be pointed out as follows:

1. Individual Communication

Communication is individualized and interaction is with carefully selected individual customer. E-name is used for this purpose.

2. Data Depository

Internet is a central depository of huge amounts of data. It can be accessed all over the world through search engines. Websites contain information and they can be downloaded as needed.

3. E-mail and Electronic Platforms

E-mail and computer faxing is used for speedy transfer of messages to conduct business. Electronic platforms can be :

- EDI : Electronic data interchange for placing orders to suppliers. It is business to business exchange of data.

- ATM : Automatic teller machine to facilitate receiving digital cash. Smart cards are used to make payments.

- Computers : They receive orders from customers.

4. On-line Selling

E-commerce uses on-line selling. It has revolutionized selling through E-tailing, specially for:

- Airlines tickets and hotel bookings.

- Shares and financial services

- Cars and other vehicles

- Computer hardware and software

- Books and music

- Consumer electronics

- Fashion goods

5. Relationship Marketing

E-commerce builds long-term mutually satisfying relations. This leads to life time loyal customers. The relations are based on superior customer value and satisfaction. Long term profits are made by lifetime customer loyalty.

Functions Of An Entrepreneur

2014-07-05T22:04:00.008-07:00

Entrepreneurial qualities consist of vision, inspiration, creativity, risk taking and achievement orientation. An entrepreneur is a visionary individual who takes risks by starting a new venture through assembling and coordinating various resources for the sake of uncertain rewards.

Entrepreneurs perform several functions to carry out their activities. The important functions of an entrepreneur are as follows:

1. Planning

Planning is predetermining future which sets target to convert new idea into reality. By planning, entrepreneurs carry out the following functions:

Setting goals

Goals are set for new venture which can be in terms of growth, profit, leadership and services. Goals are set for long-term.

Developing business plan

Business plan is developed for the new venture which consists of action plans related to production, marketing and finance. Contingency plans are developed to cope with risks.

2. Organizing

Organizing establishes a structure for the new venture. Through organizing, entrepreneurs carry out the following functions:

Grouping of tasks

Tasks required to achieve goals are defined and they are grouped into positions. Authority and responsibility of each position is established.

Coordination

Coordination is the key to entrepreneurial success. So, mechanisms are established to achieve harmony of efforts.

3. Mobilizing resources

Entrepreneurs determine the required resources and mobilize them. Resources can be:

Financial resources

Financial resources can be existing resources of the entrepreneurs or can be mobilized from friends, relatives, banks or other sources.

Human resources

Entrepreneurs acquire the needed human resources to fill-up the positions provided in the organization structure.

Technology resources

Entrepreneurs deal with new technologies. They establish production facilities and procure machinery and equipment. They upgrade technology to keep up with technological changes.

4. Relationship Management

Entrepreneurs manage a variety of relationship which are as follows:

Exchange relationship

They are related with procurement of inputs and marketing of outputs. These relationships are mainly concerned with suppliers and customers. Exchange relationships are business oriented.

Professional relationship

Entrepreneurs manage professional relationship within the venture. This is essential to motivate employees for higher productivity. They provide leadership and tackle labor problems. Such relationships are with employees, bankers, insurance companies, accountants, lawyers and consultants.

Government relationship

Entrepreneurs manage relationship with government and regulatory agencies to get licences, facilities, financing and tax concessions. Dealing with public bureaucracy is an important function of entrepreneurs.

Social relationship

Membership in clubs, professional associations and relation with local community are used to manage social relationship.

5. Control

Control is measurement and correction of performance to achieve the foals of the new venture which is based on feedback. Control can be :

Financial control

Entrepreneurs ensure proper allocation and utilization of financial resources which is needed to control cost and minimize wastage.

Production control

Entrepreneurs achieve proper combination of inputs for production. Quality control is ensured and efficiency is improved.

Managerial control

Entrepreneurs ensure management control in the new venture. They make key decisions themselves to solve problems.

Characteristics Of Entrepreneurship

2014-06-28T00:01:00.005-07:00

Entrepreneurship has the following characteristics:

1. Creating New Venture

Entrepreneurship is concerned with creation of new venture with new ideas. Such ventures starts as a small business to satisfy the unfulfilled needs in the market. These new ventures produce something new of value, create new market and new customers.

2. Hard Work And Commitment

Entrepreneurship requires hard work and commitment through devotion of time and efforts. Hard work with enthusiasm is needed to make new ideas, developing plan, determination of required resources. Entrepreneurs have deep sense of personal responsibility and high level of energy.

3. Risk Assumption

Entrepreneurship involves assumption of risks which implies possibility of loss. Probability estimates of the outcome of risk situations are made to calculate risk. Generally, new ventures tend to have high risk and high failure rate. Financial risk, career risk, social risk and psychic risk are involved in entrepreneurship.

4. Reaping Of Rewards

Entrepreneurship results in reaping of rewards. Rewards can be monetary benefits in terms of profit or non-monetary benefits in terms of personal satisfaction, self development, fame, reputation and independence in work. Monetary rewards serve as symbol of achievement and non-monetary rewards provide opportunities to make contribution toward social well-being and get social recognition.

Concept And Meaning Of Entrepreneurship

2014-06-13T01:48:00.005-07:00

The process of discovering new venture with creativity and innovation is called entrepreneurship. Entrepreneurship requires assumption of risk and reaping of awards. It brings resources together and provides option for self-employment to an individual. Entrepreneurship also creates employment opportunity for others.

Entrepreneurship is a mind set of creativity and risk taking. It is a process of identifying opportunities and bringing together factors of production to exploit these opportunities.Entrepreneurship results in creation of new venture by planning, organizing, operating and assuming the risk. It always aims for innovation, profitability and growth.

The entrepreneurial spirit has appeared as the engine of economic development. Entrepreneurship has resulted in millions of new ventures in the world. Entrepreneurship has appeared as the driving force for industrial and economic development. Therefore, the interest in the concept of entrepreneurship is growing in today's world.

Concept And Meaning Of Investment

2014-06-06T23:42:00.008-07:00

Investment

Generally, income and expenditure of an individual never equals.If current income exceeds current desires, people intend to save their surplus. With this surplus they plan to use the saving in another way. In this connections, individuals may have various alternatives. They can deposit the money in bank or purchase government or corporate bonds or invest in stocks or contribute the fund to a provident fund or purchase the real assets like land, building, plants etc. In this way what people think about the use of saving that is known as investment.

Investment refers to the sacrifice of present financial resources with the view to get additional benefit in future. Therefore, investment can be defined as a alternative or best use of the saving. Purchase of real or financial assets is considered as the investment. Such use takes place at present and almost certain. However, returns are generated in future and that are generally uncertain. Therefore, every investment involves some degree of risk which occurs due to several reasons.

Therefore, we conclude that, invest is a sacrifice of current fund or money or other resources for future benefits. It is the employment of saving or funds with the view of achieving additional income . It involves the commitment of resources that have been saved from current consumption, in the hope that some benefit will produce in future. It involves long term commitment and waiting for a reward. The sacrifice takes place in the present and reward comes later and uncertain.

Limitations Of The Law Of Substitution

2014-02-15T23:46:00.005-08:00

The law of substitution has several limitations as follows:

1. Ignorance Of Consumer

If the consumer is ignorant or blindly follows custom or fashion, he will make a wrong use of money. Due to his ignorance, he may not be aware of other more alternatives. In this case no substitution takes place and this law does not apply.

2. Commodities Indivisible

The law of substitution is based on the assumption that commodities are divisible and substituable. This is an unrealistic assumption. Though commodities may be divided according to the convenience of the consumer, it is not possible to divide all commodities in small units. There are certain commodities like fan or a radio which cannot be used in case of the indivisible commodities.

3. Utility Not Measurable

This principle of maximum satisfaction is based on the unrealistic assumption of the cardinal measurement of utility and the constancy of the marginal utility of money.

4. Customs And Fashion

Sometimes people are slave of customs or fashion and they are unable to become rational.Without being rational a consumer cannot substitute one thing for another. This is another limitation of this law.

5. Unlimited Resources

The law of substitution has no place when the resources are unlimited as in the case of free gift of nature. In such cases, there is no need to re-arrange expenditure because they can be used without any cost.

6. Choice Uncertain

The alternatives open to the consumer also assumed to be certain. But consumer choices are uncertain and even risky. In fact, it is expected utilities that determine consumer's choices of the various combinations he can buy with a given money income.

Significance Of The Law Of Substitution

2014-02-15T23:35:00.007-08:00

The law of substitution is of great practical importance in economics which are given below:

1. Basis Of Consumption

Consumer is assumed to be rational. He always tries to maximize his utility subject to budget constraint. The law of substitution helps every consumer to maximize his utility by equalizing the marginal utilities obtained from different commodities.

2. Important In The Field Of Production

The law of substitution is also of great importance in the field of production. The producer has to use several factors of production in order to maximize net profit. For this purpose, he will substitutes one factor for another till their marginal productivity are made the same. For example, if the marginal productivity of one factor say labor, is greater than that of capital, he may substitute labor for capital. In this way, he will be able to maximize his profit.

3. Important In The Field Of Exchange

This law of substitution also applies in exchange, because exchange is nothing but the principle of substitution itself. When we sell a commodity say, sugar, we get money. With this money we buy another commodity, say, wheat.Therefore, we have really substituted sugar for wheat. We continue to substitute one factor for the other till their marginal returns from all factors are equalized.

4. Importance In Distribution

In the distribution, we are concerned with the determination of rewards of the various factors of production, i.e. determination of rent, wages, interest and profit.The use of each factors of production is pushed by the firm to a point where marginal productivity of one factor is equal of other factor's marginal productivity. The law of substitute helps to equalize their marginal productivity.

5. Importance In Public Finance

The law of substitution is also applies in public finance. Government must try to maximize welfare of the community. For this, the government must down all wasteful expenditure where the return is not proportionate and instead divert the resources on more productive sector.

6. Price Determination

The principle of substitution is also applicable in the determination of prices when a commodity becomes scarce and its price becomes high. In order to bring its price down, we start substituting an abundant commodity for it, its scarcity will end.

Concept Of The Law Of Substitution

2014-02-15T23:11:00.005-08:00

Law Of Substitution

The law of substitution is also known as the law of equi-marginal utility or the law of maximum satisfaction. This law was first developed by H.H Gossen. Therefore, this law is also known as second law of Gossen. Prof. Marshall has developed and given the present shape of this law.

This law states that in order to get maximum satisfaction, a consumer should spend his limited income on different commodities in such a way that the last dollar spent on each commodity yield him equal marginal utility.

The law of substitution is also known as " The Law Of Maximum Satisfaction" because the consumer can maximize his/her satisfaction by spending income in accordance with this law. It is called " The Law Of Substitution" because the consumer will go on substituting one commodity with higher marginal utility for another commodity with lower marginal utility till the marginal utility of each commodity is equal. Suppose, there are two commodities X and Y on which a consumer has to spend a given income. If he finds that the marginal utility of commodity X is higher than the marginal utility of commodity Y, he will substitute the former for the latter till their marginal utilities are equalized.

Concept Of Consumer's Surplus

2014-02-04T23:22:00.005-08:00

The concept of consumer's surplus is one of the most important idea in economic theory especially in demand and welfare economics.

This law was first developed by French engineer A.J Dupuit in 1844 to measure the social benefits of public commodities like canals, bridges, national highways, etc. This concept was further refined and popularized by Dr. Alfred Marshall in 1890.

The essence of the concept of consumer's surplus is that people generally get more satisfaction or utility from the consumption of commodities than the actual price they pay for them. It has been found that people are willing to pay more price for the commodity than they actually pay for them. This extra satisfaction which the consumers obtain from buying a commodity has been called consumer's surplus by Marshall.

The amount of money which a person is prepared to pay for a commodity indicates the amount of utility he derives from that commodity. Greater the amount of money he is willing to pay, greater the satisfaction or utility he will obtain from it. Therefore, the marginal utility of a unit of a commodity determines the price a consumer will prepare to pay for that unit.

The total utility which a person will get from a commodity will be given by the sum of marginal utilities of the units of commodities purchased or the total price which he actually pays equal to the price per unit multiplied by the number of units purchased. Thus,

Consumer's surplus = what a consumer is prepared to pay minus what he actually pays.

So, C.S = Total Utility- Total amount spent

The concept of consumer's surplus is based on the law of diminishing marginal utility. As we purchase more units of a commodity, its marginal utility goes on diminishing. The consumer is in equilibrium when marginal utility become equal to the given price.

Criticisms Of Consumer's Surplus

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The concept of consumer's surplus has been criticized on several grounds as follows:

1. Imaginary

The concept of consumer's surplus is a purely imaginary idea. We just imagine what we are prepared to pay and subtract what we actually pay. It is all hypothetical.

2. Utility is not measurable

The concept of consumer's surplus is based on the assumption that utility can be measured quantitatively in term of money. But utility is a subjective concept. Therefore, utility cannot be measured quantitatively.

3. Marginal utility of money not constant

The concept of consumer's surplus supposes that the marginal utility of money remains constant throughout the process of exchange. But the marginal utility of money does not remain constant. When a consumer spends his given money income on the purchase of a commodity, the amount of money left him is reduced and its marginal utility to him increases. While calculating consumer's surplus, we do not take into consideration this change in the marginal utility of money.

4. Not applicable to necessaries

The concept of consumer's surplus does not apply to necessaries of life or conventional necessaries. The price of necessaries is very low whereas utility derived from them is very high. Therefore, consumer's surplus from them is infinite when a man is dying of thirst, he may be prepared to pay any amount of money for a glass of water.

5. Neglect complementary commodities

Marshall assumes that the utility of a commodity depends upon the supply of that commodity alone. He neglect the problem of complementary of commodities. Thus, he considers one commodity as independent of the others.

6. Neglect Substitutes

This concept assumes the absence of substitutes of the commodity from which the consumer derives the surplus because the presence of substitutes like tea and coffee would make the measurement of consumer's surplus difficult.