Managerial Economics

11 Key Difference between Formal and Informal Organization

Last Modified: 13 February, 2020 Leave a Comment

A formal organization is one which position, responsibility authority, and accountability of each level is clearly defined. In every organization people forms into informal social groups.

The term informal organization refers to those personal and social relations which arise when people associate with one another.

Difference between Formal and Informal Organization

The Following are the key difference between formal and informal organization:

1. Formation

Formal organization results on account of a delegation of authority, while informal organization results on account of the social interaction of the people.

2. Emphasis On

Formal organization Emphasis on the term of authority and functions.

Informal organization Emphasis on people and their relationship.

3. Creation

The formal organization is created deliberately and at the same time, the informal organization is created spontaneously.

4. Authority

In a formal organization, the formal authority is attached to the position, but in the informal organization, authority is attached to a person.

5. Well Defined Authority and Responsibility

In a formal organization rule, regulations, rights, and duties, etc. Are well defined. In an informal organization, it has unwritten rules and norms.

6. Hierarchical Authority

In the formal organization, formal authority passes in the Hierarchical way from top to bottom.

In the informal organization, authority flows upward or horizontally.

7. Size of the Organization

A formal organization may grow immensely in size whereas the size of the informal organization tends to be small.

8. Object

A formal organization is formed for the object of profits whereas informal integration arises from man’s quest for social satisfaction.

9. Stability

A formal organization exists permanently or it is stable in its existence.

The informal organization is not so stable and this dissolves at any time.

10. Necessity

Formal organization satisfies the needs and wants of people, But the formation of informal organizations essential for every enterprise.

11. Position

A formal organization has the ideal form of position whereas informal organization has informal positions.

Thus, now you know the difference between formal and informal organizations.

15 Key Features of Effective Management Control System

Last Modified: 25 March, 2020 Leave a Comment

The management control system is a necessary function to make all other managerial functions effective ensures that the corporate goals are achieved effectively and efficiently.

Features of Effective Management Control System

Following are the features of effective management control system:

1. Multi-Dimensional In Operation

The control system is multi-dimensional in the sense that it should conform to the nature and needs of the activity or position sought to be controlled.

An organization undertakes to perform a number of activities such as production, sales, finance, manpower development, marketing, etc. and for controlling all these activities, the best control system is to be developed.

2. Participation of all Concerned

The control system to be more effective it must have the participation of all the managers and his subordinates.

Controls should, not be imposed on the subordinates.

3. Focus On Strategic Control Point

The management control systems must focus on strategic control points and support the organization’s established overall priorities.

The immediate corrective action would be needed where deviation and would lead to a greater loss.

4. Timely

The management control system should be designed to Private data on the state of a given production or of a specific time.

For example, a monthly sales report, weekly or on the daily report or quality inspection on a production line, all indicate a time period.

Control systems must provide relevant information on specific time periods.

5. Understandable and Realistic

A good control system should be well defined and understood by all those directly involved.

The manager should have the know-how it works and the subordinates should know what it seeks from them.

A complicated system of control based on a mathematical analysis will be no use if they are not clear and understandable to the manager and subordinates.

6. Immediate Information of deviation

Control systems should be able to report deviations quickly so as to minimize the ill effects of these deviations.

7. Control should Focus on the Results

The ultimate aim of the controlling process is to achieve organizational objectives.

Gathering information, setting standards, identifying problems, measuring deviations and reports are simply means to this end.

8. Flexible

A good control system must be flexible enough to be adapted to new situations without much difficulty.

Because a good management control system must keep pace with the continuously changing pattern of a dynamic business world.

9. Economical

The cost of the controls system must be less than the benefits to be derived from the use of controls.

10. Simple and Clear

A good control system should be simple and clear which absorbs less effort and are more economical also.

11. Acceptable to Organisations Members

Control systems designed should be acceptable to the organization’s members.

Rigid controls might cause resentment resulting in lower morale and inefficient performance.

A management control system to be more effective, it should be acceptable to members of the organization.

12. Well Communicated

A good control system must have the characteristics of the good flow of communication from top to bottom and feedback from bottom to Upward.

13. Designed to Mix Individuals with Specialisation

A good control system should be designed to integrate individuals with specialization in diversified fields of accounting organizational analysis, strategic planning, management information system, and other related areas. This would ensure balance.

14. Must be Designed to the Right Person to Monitor

Controls must be designed in such a way that the right person monitors the activities of his own field.

The sales managers, for example, should be the right person to control the sales territories.

15. Should Work on Exception Principle

A good control system should work on the exception principle So that all-important and major deviations are brought into the attention of the top management.

This will help top management to concentrate on other activities.

Thus, now you know the features of effective management control system.

5 Major Functions of an Economic System (Explained)

Last Modified: 11 February, 2020 1 Comment

The way of organizing the economic activities by a society for its smooth living is called an economic system. The economic system is a macro aspect of economics with comprise of the legal and institutional structure under which all economic activities of the people are directed and motivated.

Functions of an Economic System

Each and every economic system has to perform the following major functions:

1. What and How Much is to be Produced?

The most important function of an economy is to decide what goods and services are to be produced. As we know in a society wants are unlimited and resources are scarce and they have alternative uses.

Thus, all wants cannot be satisfied with the given resources and society is faced with the problem of choice.

The given resources are to be put to the production of different goods and services in such a way that the maximum wants of the consumer can be satisfied.

The society has to make a choice between consumer goods and capital goods.

Even in the case of consumer goods, the choice has to be made between goods of general consumption and goods of luxury.

In a capitalist system, these decisions are made through price mechanism while in the socialist system these decisions are taken by the public authorities.

2. How to Produce?

Another function of an economy is to decide how to produce which deals with the organization of production.

For this function, the following points are considered:

The way of allocating resources to those industries whose products are most liked by the consumers.
Which goods are to be produced in the public sector and which are in the private sector.
Which firms will work in which industries and how the resources will be allocated to them.
Which techniques of production will be used for optimum production?

The society should choose such type of organization of production which can satisfy the maximum wants of people effectively and efficiently.

3. How is Production Distributed?

Another important function of an economic system is the distribution of production in society.

The production is the result of the collective efforts of all the factors of production.

Equitable and efficient distribution of production is essential for which the following points are to be considered.

How the distribution production is carried on among families, and government.
The distribution of production should be based on the principles of equality and efficiency.

In a capitalist economy, this function of distribution operation is carried on through price mechanism and considerately is creates inequalities.

But in a socialist economy, it is done by the public authorities and consequently, equality is maintained.

4. Rationing of Goods and Services

The function of an economy is to distribute the supply of goods and services so that it is adjusted to its demand.

The allocation should be done in such a way that all sections of society get the goods at a reasonable price and if these goods are in short supply during a very short period the rationing system should be introduced.

This function is performed in different ways in different economic systems.

In a capitalism system, it is done through price mechanism while in socialist economy statutory rationing, price and distribution controls are used for this purpose.

5. Economic Maintenance and Progress

In recent years it is expected from every economic system that the products and efficiency will not be adversely affected.

The efficiency will be maintained and efforts will be made to increase it.

Economic maintenance and progress can be attained only when the following points are taken into consideration:

The production capacity of the economy is maintained with an increasing population.
Depreciation of capital stock is done away with, and.
Production Technology and growth prospects are to be improved.

All these above factors are maintained in a capitalist economy through the price mechanism.

Depreciation of capital assets is compensated by charging the high price for the product.

The efficiency and productivity of labor are enhanced through financial and nonfinancial incentives and using the latest technology.

In a socialist economy, all these are based on social priorities and investments.

Thus, now you know the major functions of an economic system.

5 Main Indicators of Economic Development (Explained)

Last Modified: 25 March, 2020 Leave a Comment

The most often used index of economic development is a substantial increase in real national income. However, in recent years some of the indicators of economic development have been added.

Indicators of Economic Development

The following are the main indicators of economic development:

1. National Income Index

Economic development takes place if real national income increases over time.

There are various reasons for using national income as an indicator of economic development is given under:

The index helps us to concentrate on the performance of the economy.
A rise in the national income of a country reveals an enlarged absolute size of the economy. It makes a country powerful internally and externally.
The national income reveals the components like consumer goods and investment goods and their trends.

This indicator is not useful as it is used for comparing the performance of two economics with different population bases.

In such comparison per capita income would be the better measurement.

2. Per Capita Income Group

The national income indicator does not reflect the true picture of the development of the economy.

The per capita income index is prepared for the following reasons:

It reveals the increase in the availability of goods and services per head.
This index is very useful for developing countries because it reveals the population growth. If the per capita income is very low and the population is rising rapidly, a rise in per capita income as a measure of removal of poverty can be used.
The index can be used for comparing the standard of living in different countries.

But this measure (index of economic development) has been criticized on the following grounds:

The per capita income index does not take into consideration the distribution aspect.
The indicator measures the number of goods and services but it is not the qualitative aspects of life, education and health facilities, etc. Which should not be promoted by economic development.

3. Physical Quality of life Index

In many developing countries despite economic development, no improvement has taken place in the quality of life.

The physical quality of life index into consideration the non-income elements of life.

This index consists of life expectancy, infant mortality, and literacy.

The country has a high life expectancy, the lowest infant mortality and the highest literacy is considered to be superior to other countries.

This index of development is superior to the per capita income index because it reveals the end result of the use of National Income in the country concerned.

But the index is not suitable for those countries with a vast and rapidly rising population as these countries have the very little amount for the improvement of the physical quantity of life.

4. Basic Needs Approach

According to this indicator of economic development, the development of an economy is judged in terms of the extent to which the basic needs of the masses are satisfied.

The components of basic needs are food, pure drinking water, sanitation, health, and education, etc.

The index of development is useful especially from the common man’s point of view as he is more concerned with his basic needs rather than the total production in the country.

5. Human Development Index

This index of economic development has been prepared by the United Nations called the Human Development Index (HDI).

It consists of per capita income, educational attainment, and life expectancy.

The first is an economic indicator while the last two are non-economic indicators.

The index does not measure the absolute level of human development. It ranks countries in relation to one another.

The index is superior to other indicators of economic growth as it takes into consideration both income and non-income factors.

Thus, now you know the key indicators of economic development.

8 Major Causes of Wage Differentials (With Examples)

Last Modified: 11 February, 2020 2 Comments

Labour is a human factor of production and its all units are not identical because of differences in efficiency and productivity of labour.

There is a wide difference in the wages of workers and this variation differs from one occupation to another, one industry to another, one region to another and even from one country to another.

Causes of Wage Differentials

The causes of wage differentials are as follows:

1. Nature of Employment

Wage differentials may be on account of acceptance or non-acceptance of the employment.

People may accept a job with low remuneration with attractive working and living conditions while may not accept high Paid employment with bad living and working conditions and tiresome Jobs.

The nature of employment will affect wages.

2. Profitability of Success

Wage differentials are found with the profitability of success in employment.

Where the probability of success is uncertain, wages will be high while in case of an employee having risk and failures the wage rate will below.

3. Training and Education

A job with a low level of training and education will have low wage rates Higher Education and Training required high wages rates.

People generally accept the easy jobs rather than a difficult job despite the low wage rates.

4. Security and Stability of Employment

Secure and stable employment has low wage rates while temporary and seasonal employees will have High wage rate.

5. Geographical Differences

Wage differentials are on the basis of geographical differences based on Industrial and occupational differences.

In cities, wage rates are high while rural labour is available at low wage rates.

6. Market Imperfection

Wage Differentials are also found on account of imperfect market competition in the factor market.

Inertia, family attachment, language, religion, caste are the factors by which labour has Limited mobility from one region to another.

From one occupation to another. from one industry to another. On account of it, wage differentials are found.

7. Responsibility and Accountability of a Job

If a job presupposes responsibility and accountability the wage rate will be high while the wage rate will be low in those cases where responsibility and accountability are rare.

8. Strong and Organised Trade Union

Wage differentials are also found on account of the bargaining power of the trade union.

If the Trade union is well organized and strong the wage rates will be high in comparison to those organizations wherein the trade unions are weak and have weak bargaining power.

Thus, now you know the major causes of wage differentials in economics.

17 Role and Importance of Small Scale Industries (Economy)

Last Modified: 25 March, 2020 4 Comments

Small scale industries occupy an important place in the country’s economy. This faces many serious problems, most of which are associated with the smallness of their operations.

Role and Importance of Small Scale Industries

The Small-scale sector plays a vital role in the growth of the countries.

Following is the role and importance of small scale industries:

1. Employment Potential

Small-scale industries are labour intensive. A given amount of capital invested in small-scale industrial undertakings is likely to provide more employment.

At least in the short run, then the same amount of capital invested in large-scale undertakings.

The Encouragement of small-scale industries would serve to counteract the seasonal unemployment in agriculture and Thus to utilize labour which might otherwise go to waste.

These industries offer limitless opportunities for self-employment. It is these self-employed persons who are the backbone of the nation.

Every effort must be made to strengthen the position of these proud and self-reliant persons in the country’s economy.

2. Less Capital Requirement

Small-scale industries are the capital-light example they need a relatively smaller amount of capital than that required by large-scale industries.

Thus, one of the great advantages of small-scale industries is that they make possible economies in the use of capital.

As capital is very scarce in under-developed countries.

It may be used to Greater advantage in the early stages of development if it is used to expand transport and other public utilities, irrigation, and other agricultural requirements and those forms of large-scale industry where the advantages outstandingly great.

3. Latent Resources

Small-scale industries will fall into being capital that would not otherwise have come into existence.

The spreading of small-scale industries over the countryside would encourage the habits of thrift and investment in rural areas.

Moreover, the enterprising small manufacturer has to scrape together capital where the can find it.

He often manages to get it from relatives and friends.

This capital probably would never have come into existence is productive capital had it not been for the Small Enterprises.

4. Skill Light

Another attraction of small-scale industries lies in their being skill light a large scale industry calls for a great deal of Management and supervisory skill foremen, engineers, accountants, and so on. Like capital, these skills are also in very short supply in our country, and it is important to economies as much as possible in their use.

Small-scale industries provide a way of doing this and at the same time provide industrial experience and serve as a training ground for a large number of small-scale industries managers, at least some of whom develop the capacity for managing large-scale undertakings.

5. Use of Local Resources

Small-scale industries are importing light like they used a relatively low proportion of imported equipment and materials as compared with the total amount of capital used in them.

Large-scale industries, on the other hand, require huge imports in the form of equipment and materials, upsetting the country’s Balance of payments thereby.

A low import intensity in the capital structure of the small-scale industries reduces the need for foreign capital or foreign exchange earnings.

Thus, obviates Balance of payment difficulties later and currently retains within the country a large part of whatever induced effects may materialize.

6. Quick Production

Small-scale industries are the “quick investment type” like, those in which the time required between the investment of capital and the start of the flow of goods produced is relatively short.

In a developing economy with strong inflationary pressure and the need for a rapid rise in the living standards, the importance of such quick investment type Industries can hardly be exaggerated.

The anti-inflationary requirements and the requirements of development are often in conflict but a compromise can be found in the small-scale industries which have a high fruition coefficient and also a short fruition lag.

7. Decentralization

The development of small-scale industries will being about the decentralization of industries and will thus, promote the object of Balanced regional development.

A major drawback in the industrial structure of our country is that the regional distribution of industries is exceedingly uneven.

On the other hand, there is a disappropriate net growth of large-scale industries in a few areas.

8. Equitable Distribution

Small-scale industries and cottage industries have the additional advantage that small-scale industries they secure a more even distribution of income and wealth.

The development of large-scale industries tends to concentrate large income and wealth in a few hands, which is undesirable from the social point of view, in that they involve exploitation of Man by man.

They also create vested interest which puts obstacles in the way of the economy marching towards its goal of the socialistic pattern of society.

9. Mobility of Labour

By carrying the job to the worker, small-scale industries can overcome the difficulties of terrestrial immobility.

Moreover, unlike large Industries small-scale industries do not create problems of slum housing, health, and sanitation, etc. and the attendant disease, misery, and squalor.

10. Support of Large-Scale Industries

Another highly useful role of small-scale industries in developed and underdeveloped countries is the great support that the development of large-scale industries can obtain from small-scale industries.

This is possible in the following ways:

Small-scale industries may manufacturer small parts like cycle parts, which may letter be assembled by the large Industries.
The large-scale industry may produce semi-finished goods which may lead to being made into several types of finished goods in small-scale industries setups, such as agricultural implements and cutlery from iron and steel, household utensils from sheet metals.

11. Reduction of Dependence on Agriculture

The growth of Cottage and small-scale industries will divert surplus labour from our overburdened agriculture and thus bring about a more desirable occupational distribution.

12. Relieving Congestion in Urban Areas

By providing remunerative employment in the rural areas, these Industries will relieve congestion in overcrowded urban centers.

13. Sustaining Green Revolution

Small-scale industries can help sustain the green revolution in the countryside mainly through the development of agro-based industries and services, such as the production of farm implements and equipment for food processing industries and Agricultural Machinery repair and service workshops.

Besides, the expansion of rural income as a result of the green revolution is expected to boost the consumer demand for sophisticated items such as radios, TV sets, transistors, cycles, sewing machines and cosmetics, which the small-scale industries can conveniently meet.

14. Foreign Exchange Earnings

From the point of Balance of payments, small-scale industries are justified on two Grounds.

One, they do not require much foreign exchange resources for their establishment and to that extent place almost no extra burden on the balance of payment, position.

Two, small-scale industries can contribute to the foreign exchange Kitty of the country by adding to exports.

These industries are exporting traditional as well as non-traditional items.

15. Production of Consumer

Small-scale industries, predominantly producers of consumer goods, have a key place in the process of development.

The industrialization of the country, with emphasis on heavy industries, requires large capital investment, living little for large and consumer goods industries.

In the process of industrialization, when the income increases the demand for consumer goods also increases.

If the supply of consumer goods does not exist as it leads to price rise, which will thus not only lower the standard of living of the poor workers but will also jeopardize the very process of growth.

16. Political and Social Advantages

Small-scale industries can help in awakening the powerful dormant forces among masses for use in constructive activities.

The freedom of work, self-reliance, self-confidence, enthusiasm to achieve, and all such traits of a healthy Nation can be built around the material activities performed in these industries.

17. Preservation of Inherited Skill

Small-scale industries were helpful in the preservation of the inherited skill of our artisans which would otherwise languish and disappear.

A great many people in villages and small towns will be saved from the mechanical, monotonous and robot-like life associated with big industrial cities.

These non-economic factors cannot be concretized into cold statistics. In fact, these are the essence of life.

Conclusion

Thus, Small-scale industries have a crucial role to play in the economy:

Reducing the incidence of unemployment and underemployment.
Increasing National income.
In meeting the shortage of consumer goods.
In accelerating economic growth by making optimum use of natural and human resources.
In promoting balanced regional development.
In reducing inequalities in the distribution of income and wealth.
In relieving the present excessive pressure on land and overcrowding in urban areas, and in sustaining the Green Revolution.

Thus, now you know the role and importance of small scale industries in an economy.