Nature and Classification of Human Wants

Human wants are endless even when provided with every need. In terms of
Economics, wants to refers to something that individual desires, which is not
something that the individual cannot live without. Want is non-essential in nature.
With changes in innovation and technology, wants are ever-increasing. Although
wants are not needed to sustain life unlike needs, it helps to understand the demand
and supply of various commodities.

Classification of Human Wants

Human wants can be classified into various categories depending on various bases
in Economics, which are as follows:

 Economic and Non-Economic wants

Want for things that can be bought by paying a price in money or currency
are economic wants, such as they want for a diamond necklace.

Want for non-material qualities of human life such as peace, equality,

acceptance, etc., are called non-economic wants.

 Individual and Collective Wants

Individual wants refer to the wants of one specific person who may not be
wanted by anyone else. Such wants vary from one person to another.

Collective want refers to those wants which are required by a commodity

such as a hospital or a school. 

 Necessities, Comforts, and Luxuries

Necessities refer to the want of products or services essential for survival.
Examples of such wants are food, clothing, and housing. Out of these are the
wants that improve the efficiency of humans and improve the quality of life
such as food, better house, etc.

Comfort refers to those products or services that help in making life

satisfactory. A human can live without these comforts but they help make
life easier for them such as AC, cars, etc.
 Luxuries are those products that provide humans with a sense of entitlement.
They make humans feel better about themselves. These are products and
goods that humans don't need but are mostly meant for showing off. Some
examples are jewellery, expensive cars, electronic goods, etc.

The classification of human wants varies on several bases and these are as follows.

 Economic and Non-Economic Wants: Economic wants are related to

commodities and can be satisfied using money. While non-economic wants
are something which money and goods cannot suffice, like peace, affection,
etc.
 Individual and Collective Want: Individual wants are those which are
required by one specific person. For example, you want a school bag, you
want to eat chocolates and such other wants. On the other hand, collective
wants are those which are required by a community as a whole. For
example,  a school, hospital, etc., are collective wants. Again, if you want
your country to win the match, it is collective rather than individual want.
 Necessities, Comforts, and Luxuries: Necessities are those commodities
that are essential for human survival. These are the most important wants,
including clothes, food, shelter, etc. Among the necessities are the wants
which help in increasing efficiency. These include diet foods, a better home,
etc. These are a result of the habits and customs of humans.

Comforts are those commodities that help in making life more satisfactory. These
are neither necessarily required nor are urgent wants. One can also live without
comforts. Some of these items include ACs, purchasing clothes for some special
occasions, etc. Luxuries are goods and commodities that provide humans with a
sense of entitlement. They allow humans to hold prestigious positions. They are
expensive stuff and need not essentially be a part of our living. Some of them
include cars, jewellery, and other commodities.

Characteristics
There are several characteristics of human wants, they can be stated as follows:
 Iterative Wants: Some commodities in life are required on a daily basis
which may not be essential for many other individuals. For example, insulin
is only required by diabetic patients.
 Changing Want with Age: Humans want different things at different stages
in life. A kid would want to play with a toy while a teenager would want to
play with a PlayStation.
 Gender-Specific Wants: Gender plays a vital role in wanting different
products. For example, want for a fancy dressing item will vary for men and
women.
 Geographic Variation of Wants: People living in hotter regions will want
coolers and ACs but people living in hill stations would want temperature
regulators. This type of want is quite self-explanatory.
 Health Specific Want: People in need of medicines and medical facilities
would want better access to facilities of services such as high-end health
care facilities. Personal preferences or biases might also play a role here.

The nature of human wants varies depending on several parameters. These

further describe the characteristics of human wants. Some of the
characteristics are as follows.

 Iterative Wants: Some commodities are required on a daily basis. These

include food, water, and others. These fall under iterative wants. However,
these vary from person to person. Example: Some need to take medicines on
a regular basis, others don’t. 
 Variation of Wants with Age: Adults have completely different wants from
of kids. While a 25-year old wants a stable job and life, a 2-year old is
satisfied and happy with toys. 
 Gender Wants: Depending on their needs, likes, and dislikes, gender plays
an essential role along with age. Example: Often girls would want fancy
clothing, and boys will want to ride a bike. 
 Geographic Variation Wants: For those living in northern parts, they
would have a good room heater while those living in desert lands would
want an AC. Geography plays an important role in what people want and
why.
 Wants vary with Health: Those who are fit, do not require any medicines,
but for the unfit ones, hospitals and good nutrition are a want.
  Endless Human Wants: Wants are ever-increasing at par with innovation
and technology. Humans never get satisfied. The more you provide, the
more they will consume and want. 

Conclusion: 
At the end of it all, the economy is completely related and revolves around human
wants. It helps the government in understanding the demand-supply and chain. Are
you wondering what are the prime reasons for the skyrocketing human wants? This
is usually because of the following reasons.

 Expectation and need for a better living. 

 Increase in population with each passing day. 

These factors highly contribute to the ever-rising human wants.

Wants never end, the more you give, the more people want. This article helps you
understand the types and characteristics of wants in a more elaborate manner. Look
it up and understand the content thoroughly for your exams.

 Wants are unlimited. A human is never truly satisfied, and so his wants to are
endless. We may temporarily satisfy some of our wants but they always
reoccur.

 Different wants have varying degrees of intensity. Some wants are extremely
urgent, some are less intense.

 Human wants tend to be competitive. We have limited means and so we cannot

satisfy all of our wants. So they compete with each other. And the most urgent
want will be satisfied.

 Wants can be complementary as well. To satisfy our want for one good we have
to make arrangements for another. So now we have the want of two goods. For
example to run a car you need petrol.
 The wants of any person will constantly be changing according to the time and
place and situation of the person.

 Over time wants of a person can become his habits or customs.

Classification of Human Wants

We can classify wants into three broad categories in economics. These are
Necessaries, Comforts, and Luxuries. Let us take a look at all three.

1] Necessaries
These are the human wants absolutely essential for living and surviving. Further
necessaries will divide into necessaries for life, for efficiency and finally
conventional necessaries. First and most important wants are obviously necessaries
for life. These include food, water, clothing, shelter, etc.

And then there are necessaries that improve our efficiency and well being like
comfortable housing, nourishing foods, etc. Finally, there are conventional
necessaries that arise out of habits, customs or conventions.

2] Comforts
These are the extra wants of the human after necessaries. They are not as essential or
urgent as necessaries. Comforts are the wants that make the life of the human
comfortable and satisfying. Generally, these include items that save labour on behalf
of the human or provide comfort to him in his life. So items such as fans, furnished
houses, special clothing for occasions, etc fall under this category of human wants.

3] Luxuries
These are goods that give humans pleasure and prestige in society. They are not
needed for existence or comfort but provide happiness and acceptance in the world.
These wants may be called superfluous. And such items tend to be expensive.
Some examples of luxuries are cars, diamond jewelry, expensive designer clothing,
ACs. As you will notice all these items are not essential to our living. They are items
of prestige.

Law of Demand

Law of demand states that there is an inverse relation between the price of a
commodity and its quantity demanded, assuming all other factors affecting demand
remain constant. It means that when the price of a good falls, the demand for the
good rises and when price rises, the demand falls.
Law of demand may be explained with the help of the following demand schedule
and demand curve :

The above table and diagram show that as the price of the good reduces from Rs 5
to Rs 4, the demand for the good increases from 100 to 200 units.
Assumption of the law of demand: The law of demand is valid only when all other
factors determining demand like income of the buyers, price of related goods,
tastes and preferences of the buyer etc. remain constant.

Determinants of Demand 
Every factor has a unique impact on demand. We need to understand the meaning
of determinants and types of demand. The following are the few determinants of
demand. 
Price of the Product
Price is used as a parameter by the people to decide if all the other factors remain
constant or equal. According to the law of demand, the decrease in the demand
follows an increase in the price and an increase in the demand follows a reduction
in price. 

The Income of the Consumers

If the income rises, the number of goods demanded by the consumers also
increases. Meanwhile, a drop in income leads to lower consumption levels. Thus
the relationship between the demand and the income is not direct. However, the
effect the income of a consumer has on the demand for a product depends on the
type of commodity. With most goods, there is a positive relationship between
demand and the income of the buyer. On the other hand, a change in income can
have an inverse effect on the demand for a product. In these cases, when the
income of the consumer increases, he/she tends to buy a high-quality product and
avoid inferior goods. 

Number of Buyers in the Market

The number of consumers plays a vital role in net/total demands. When the number
increases, the demand also increases. In some cases, the demand for the product
increase with the changes in the population. In other cases, the demand increases as
the product become more appealing to the customers. In such scenarios, the
population remains the same but more people are buying the same commodity. 

Consumer’s Expectations 
Consumer expectation is one of the major factors that affect the demand for a
commodity. That is why a business has to focus on both habits and expectations of
its target audience, which makes it much harder to predict the demand for your
product. Sometimes, consumers might wait before buying a product as they are
expecting what might happen in the future. For instance, a person might not buy a
mobile phone because they are waiting for a new model.
Tastes and Preferences of The Consumers 
Consumers can be picky about the product they want. When they are shopping for
a product, it depends on their tastes and preferences as to what brand or model they
will choose. These tastes and preferences of a consumer can change due to a
number of reasons, both internal and externals. These factors include age, location,
marital status, and much more. Even though taste and preference are intangible,
they can have a huge impact on the demand for any given commodity. For
instance, a consumer is more likely to buy a product when they see a certain
celebrity endorsing it. However, if the consumer finds out there are some bad side
effects of a product, the demand for that commodity will decrease drastically. 

Complement Goods 
Complement goods are the ones that go with each other. Let’s take care and petrol,
for example. If there is an increase in the price of petrol, the demand for petrol will
decrease and so will the demand for a car. So, two goods that complement each
other will have an inverse relationship between the price of one commodity and the
demand for the other. 

Substitute Product
In this case, when the price of one product increases, the demand for another
product rises. No matter what you are selling, you will always face competition in
the market. That is why you have to pay attention to what your competitors are
selling as they can take a large chunk of your market share. So, to determine the
demand for your product, you have to focus on the availability of substitute goods
in the market. Consider the following factors:
 The price gap between your and your competitors’ products. 
 How many items of the same product line does the competitor deal in?
 The similarity between your product and the one sold by the competitor.  

Elasticity of Demand

Elasticity is a concept in economics that talks about the effect of change in one
economic variable on the other.  
 
Elasticity of Demand, on the other hand, specifically measures the effect of
change in an economic variable on the quantity demanded of a product. There are
several factors that affect the quantity demanded for a product such as the income
levels of people, price of the product, price of other products in the segment, and
various others. 
Elasticity of Demand
 
Elasticity of Demand, or Demand Elasticity, is the measure of change in quantity
demanded of a product in response to a change in any of the market variables,
like price, income etc. It measures the shift in demand when other economic
factors change. 
 
In other words, the elasticity of demand is the percentage change in quantity
demanded divided by the percentage change in another economic variable. 
 
The demand for a commodity is affected by different economic variables: 
 
1. Price of the commodity
2. Price of related commodities 
3. Income level of consumers
Types of Elasticity of Demand
 
On the basis of different factors affecting the quantity demanded for a product,
elasticity of demand is categorized into mainly three categories: Price Elasticity of
Demand (PED), Cross Elasticity of Demand (XED), and Income Elasticity of
Demand (YED). 
 
Let us look at them in detail and their examples.
 
 
1. Price Elasticity of Demand (PED)
 
Any change in the price of a commodity, whether it’s a decrease or increase,
affects the quantity demanded for a product. For example, when there is a rise in
the prices of ceiling fans, the quantity demanded goes down.  
 
This measure of responsiveness of quantity demanded when there is a change in
price is termed as the Price Elasticity of Demand (PED).
 
The mathematical formula given to calculate the Price Elasticity of Demand is: 

 
  PED = % Change in Quantity Demanded % / Change in Price
 
The result obtained from this formula determines the intensity of the effect of price
change on the quantity demanded for a commodity. 
 
 
2. Income Elasticity of Demand (YED)
 
The income levels of consumers play an important role in the quantity demanded
for a product. This can be understood by looking at the difference in goods sold in
the rural markets versus the goods sold in metro cities. 
 
The Income Elasticity of Demand, also represented by YED, refers to the
sensitivity of quantity demanded for a certain good to a change in real income (the
income earned by an individual after accounting for inflation) of the consumers
who buy this good, keeping all other things constant. 
 
Speaking of inflation, you can also take a look at our blog on what is inflation.
 
The formula given to calculate the Income Elasticity of Demand is given as:
 
YED = % Change in Quantity Demanded% / Change in Income 
 
The result obtained from this formula helps to determine whether a good is a
necessity good or a luxury good. 
 
 
3. Cross Elasticity of Demand (XED)
 
In a market where there is an oligopoly, multiple players compete. Thus, the
quantity demanded for a product does not only depend on itself but rather, there is
an effect even when prices of other goods change. 
 
Cross Elasticity of Demand, also represented as XED, is an economic concept that
measures the sensitiveness of quantity demanded of one good (X) when there is a
change in the price of another good (Y), and that’s why it is also referred to as
Cross-Price Elasticity of Demand. 
 
The formula given to calculate the Cross Elasticity of Demand is given as: 
 
XED = (% Change in Quantity Demanded for one good (X)%) / (Change in Price
of another Good (Y))
 
The result obtained for a substitute good would always come out to be positive as
whenever there is a rise in the price of a good, the demand for its substitute rises.
Whereas, the result will be negative for a complementary good. 
 
These three types of Elasticity of Demand measure the sensitivity of quantity
demanded to a change in the price of the good, income of consumers buying the
good, and the price of another good. 
 
5 other types of Elasticity of Demand
 
The effect of change in economic variables is not always the same on the quantity
demanded for a product. 
 
The demand for a product can be elastic, inelastic, or unitary, depending on the rate
of change in the demand with respect to the change in the price of a product. 
 
On the basis of the amount of fluctuation shown in the quantity demanded of a
good, it is termed as ‘elastic’, ‘inelastic’, and ‘unitary’.
 
 An elastic demand is one that shows a larger fluctuation in the quantity demanded
of a product, in response to even a little change in another economic variable. For
example, if there is a hike of $0.5 in the price of a cup of coffee, there are very
high chances of a steep decline in the quantity demanded. 
 
 An inelastic demand is one that shows a very little fluctuation in the quantity
demanded with respect to a change in another economic variable. An example of
this can be petrol or diesel. 
 
 Unitary elasticity is one in which the fluctuation in one variable and quantity
demanded is equal.

 
We can further classify these elastic and inelastic types of demand into five
categories.

Demand Curves

 
 
1. Perfectly Elastic Demand
 
When there is a sharp rise or fall due to a change in the price of the commodity, it
is said to be perfectly elastic demand. 
 
In perfectly elastic demand, even a small rise in price can result in a fall in demand
of the good to zero, whereas a small decline in the price can increase the demand to
infinity. 
 
However, perfectly elastic demand is a total theoretical concept and doesn’t find a
real application, unless the market is perfectly competitive and the product is
homogenous. 
 
The degree of elasticity of demand helps to define the slope and shape of the
demand curve. Therefore, we can determine the elasticity of demand by looking at
the slope of the demand curve. 
 
A Flatter curve will represent a higher elastic demand. Thus, the slope of the
demand curve for a perfectly elastic demand is horizontal.
 
 
2. Perfectly Inelastic Demand
 
A perfectly inelastic demand is the one in which there is no change measured
against a price change. 
 
Like perfectly elastic demand, the concept of perfectly inelastic is also a theoretical
concept and doesn’t find a practical application. However, the demand for
necessity goods can be the closest example of perfectly inelastic demand. 
 
The numerical value obtained from the PED formula comes out as zero for a
perfectly inelastic demand. 
 
The demand curve for a perfectly inelastic demand is a vertical line i.e. the slope of
the curve is zero. 

 
 
3. Relatively Elastic Demand
 
Relatively elastic demand refers to the demand when the proportionate change in
the demand is greater than the proportionate change in the price of the good. The
numerical value of relatively elastic demand ranges between one to infinity. 
 
In relatively elastic demand, if the price of a good increases by 25% then the
demand for the product will necessarily fall by more than 25%.
 
Unlike the aforementioned types of demand, relatively elastic demand has a
practical application as many goods respond in the same manner when there is a
price change. 
 
The demand curve of relatively elastic demand is gradually sloping. 

Demand Curves

4. Relatively Inelastic Demand

 
In a relatively inelastic demand, the proportionate change in the quantity demanded
for a product is always less than the proportionate change in the price. 
 
For example, if the price of a good goes down by 10%, the proportionate change in
its demand will not go beyond 9.9..%, if it reaches 10% then it would be called
unitary elastic demand. 
 
The numerical value of relatively inelastic demand always comes out as less than 1
and the demand curve is rapidly sloping for such type of demand. 
 
Recommended Read: Microeconomics vs Macroeconomics
 
 
5. Unitary Elastic Demand
 
When the proportionate change in the quantity demanded for a product is equal to
the proportionate change in the price of the commodity, it is said to be unitary
elastic demand. 
 
The numerical value for unitary elastic demand is equal to 1. The demand curve for
unitary elastic demand is represented as a rectangular hyperbola. 
 
 
Conclusion
 
We can conclude the blog by stating the fact that the demand for a commodity is
affected by several factors and the three main types of elasticity of demand
explains the effect of those factors. 
 
To explain the extent of the effect of the economic variables on the quantity
demanded, we have 5 other types of elasticity of demand which are perfectly
elastic, perfectly inelastic, relatively elastic, relatively inelastic, and unitary
elastic.  

Major Factors which Affects the Elasticity of Demand of a Commodity 

1. Nature of commodity:
Elasticity of demand of a commodity is influenced by its nature. A commodity for
a person may be a necessity, a comfort or a luxury.

i. When a commodity is a necessity like food grains, vegetables, medicines, etc., its
demand is generally inelastic as it is required for human survival and its demand
does not fluctuate much with change in price.

ii. When a commodity is a comfort like fan, refrigerator, etc., its demand is
generally elastic as consumer can postpone its consumption.

iii. When a commodity is a luxury like AC, DVD player, etc., its demand is
generally more elastic as compared to demand for comforts.

iv. The term ‘luxury’ is a relative term as any item (like AC), may be a luxury for a
poor person but a necessity for a rich person.

2. Availability of substitutes:
Demand for a commodity with large number of substitutes will be more elastic.
The reason is that even a small rise in its prices will induce the buyers to go for its
substitutes. For example, a rise in the price of Pepsi encourages buyers to buy
Coke and vice-versa.

Thus, availability of close substitutes makes the demand sensitive to change in the
prices. On the other hand, commodities with few or no substitutes like wheat and
salt have less price elasticity of demand.

3. Income Level:
Elasticity of demand for any commodity is generally less for higher income level
groups in comparison to people with low incomes. It happens because rich people
are not influenced much by changes in the price of goods. But, poor people are
highly affected by increase or decrease in the price of goods. As a result, demand
for lower income group is highly elastic.

4. Level of price:
Level of price also affects the price elasticity of demand. Costly goods like laptop,
Plasma TV, etc. have highly elastic demand as their demand is very sensitive to
changes in their prices. However, demand for inexpensive goods like needle,
match box, etc. is inelastic as change in prices of such goods do not change their
demand by a considerable amount.

5. Postponement of Consumption:
Commodities like biscuits, soft drinks, etc. whose demand is not urgent, have
highly elastic demand as their consumption can be postponed in case of an increase
in their prices. However, commodities with urgent demand like life saving drugs,
have inelastic demand because of their immediate requirement.

6. Number of Uses:
If the commodity under consideration has several uses, then its demand will be
elastic. When price of such a commodity increases, then it is generally put to only
more urgent uses and, as a result, its demand falls. When the prices fall, then it is
used for satisfying even less urgent needs and demand rises.

For example, electricity is a multiple-use commodity. Fall in its price will result in
substantial increase in its demand, particularly in those uses (like AC, Heat
convector, etc.), where it was not employed formerly due to its high price. On the
other hand, a commodity with no or few alternative uses has less elastic demand.

7. Share in Total Expenditure:

Proportion of consumer’s income that is spent on a particular commodity also
influences the elasticity of demand for it. Greater the proportion of income spent
on the commodity, more is the elasticity of demand for it and vice-versa.

Demand for goods like salt, needle, soap, match box, etc. tends to be inelastic as
consumers spend a small proportion of their income on such goods. When prices of
such goods change, consumers continue to purchase almost the same quantity of
these goods. However, if the proportion of income spent on a commodity is large,
then demand for such a commodity will be elastic.

8. Time Period:

Price elasticity of demand is always related to a period of time. It can be a day, a

week, a month, a year or a period of several years. Elasticity of demand varies
directly with the time period. Demand is generally inelastic in the short period.

It happens because consumers find it difficult to change their habits, in the short
period, in order to respond to a change in the price of the given commodity.
However, demand is more elastic in long rim as it is comparatively easier to shift
to other substitutes, if the price of the given commodity rises.

9. Habits:
Commodities, which have become habitual necessities for the consumers, have less
elastic demand. It happens because such a commodity becomes a necessity for the
consumer and he continues to purchase it even if its price rises. Alcohol, tobacco,
cigarettes, etc. are some examples of habit forming commodities.

Finally it can be concluded that elasticity of demand for a commodity is affected

by number of factors. However, it is difficult to say, which particular factor or
combination of factors determines the elasticity. It all depends upon circumstances
of each case.
Meaning of a Market:
A market can be characterised as where a couple of parties can meet, which will
expedite the trading of products and services. The parties involved in the market
activities are the sellers and the buyers. A market is an actual structure like a retail
outlet, where the dealers and purchasers can meet eye to eye, or in a virtual
structure like an internet-based market, where there is the truancy of direct, actual
contact between the purchasers and vendors.

Types of the market:

Monopoly:
A monopolistic market is a market formation with the qualities of a pure market. A
pure monopoly can only exist when one provider gives a specific service or a
product to numerous customers. In a monopolistic market, the imposing business
organisation, or the controlling organisation, has the overall control of the entire
market, so it sets the supply and price of its goods and services. For example, the
Indian Railway, Google, Microsoft, and Facebook.

Oligopoly:
An oligopoly is a market form with a few firms, none of which can hold the others
back from having a critical impact. The fixation or concentration proportion
estimates the piece of the market share of the biggest firms. For example,
commercial air travel, auto industries, cable television, etc.

Perfect competition:
Perfect competition is an absolute sort of market form wherein all end consumers
and producers have complete and balanced data and no exchange costs. There is an
enormous number of makers and customers rivalling each other in this sort of
environment. For example, agricultural products like carrots, potatoes, and various
grain products, the securities market, foreign exchange markets, and even online
shopping websites, etc.
Monopolistic competition:
Monopolistic competition portrays an industry where many firms offer their
services and products that are comparative (however somewhat flawed) substitutes.
Obstructions or barriers to exit and entry in monopolistic competitive industries are
low, and the choices made of any firm don’t explicitly influence those of its rivals.
The monopolistic competition is firmly identified with the business technique of
brand separation and differentiation. For example, hairdressers, restaurant
businesses, hotels, and pubs.

Monopsony:
A monopsony is a market situation wherein there is just a single purchaser, the
monopsonist. Just like a monopoly, a monopsony additionally has an imperfect
market condition. The contrast between a monopsony and a monopoly is basically
in the distinction between the controlling business elements. A solitary purchaser
overwhelms a monopsonist market while a singular dealer controls a monopolised
market. Monopsonists are normal to regions where they supply most of the locale’s
positions in the regional jobs. For example, a company that collects the entire
labour of a town. Like a sugar factory that recruits labourers from the entire town
to extract sugar from sugarcane.

Oligopsony:
An oligopsony is a business opportunity for services and products that is
influenced by a couple of huge purchasers. The centralisation of market demand is
in only a couple of parties that gives each a generous control of its vendors and can
adequately hold costs down. For example, the supermarket industry is arising as an
oligopsony with a worldwide reach.

Natural monopoly:
A natural monopoly is a kind of a monopoly that can exist normally because of the
great start-up costs or incredible economies of scale of directing a business in a
particular industry which can bring about huge barriers to exit and entry for
possible contenders. An organisation with a natural monopoly may be the main
supplier of a service or a product in an industry or geographic area. Normally,
natural monopolies can emerge in businesses that require the latest technology, raw
materials, or similar factors to work. For example, the utility service industry is a
natural monopoly. It consists of supplying water, electricity, sewer services, and
distribution of energy to towns and cities across the country.
Price Determination in a Perfectly Competitive Market
In a perfectly competitive market, the number of buyers and sellers is large. The
buyers and sellers are in competition to buy and sell a homogeneous product. The
number of buyers and sellers in such a market is so large that each of them buys or
sells a negligible fraction of the total quantity bought and sold in the market. As a
consequence, none of them has any individual influence on the process of price
determination.

In a perfectly competitive market, equilibrium price of the product is determined

through a process of interaction between the aggregate or market demand and the
aggregate or market supply. Equilibrium price is the price at which the market
demand becomes equal to market supply.

If, at any particular price, demand and supply are equal, the buyers and sellers both
remain satisfied, for at the said price the sellers supply what the buyers demand,
and the buyers demand what the sellers supply.

Therefore, the buyers and sellers accept this price, and buy and sell accordingly.
None of them is dissatisfied, and so, none of them would want a change in the
price. That is why this price is called the equilibrium price.

We may explain the process of price determination as a matter of interaction

between demand and supply with the help of Fig. 10.14. The DD curve in this
figure is the aggregate or market demand curve for the product. This curve tells us
what is the aggregate demand of the buyers for the good at any particular price,
and, as such, this curve is the horizontal summation of the individual demand
curves of all the buyers.

For example, from the DD curve of Fig. 10.14 we come to know that at the price p
= p,, the market demand for the good is P 1G. Again, at p = p2, the market demand
amounts to p2H.
Owing to the law of demand, the individual demand curves are downward sloping
towards right. That is why the market demand curve as a horizontal summation of
the individual demand curves would also be downward sloping towards right (or
negatively sloped).

On the other hand, the SS curve in Fig. 10.14 is the aggregate or market supply
curve for the good. We may know from this curve the market supply of the good at
any particular price, and so, this curve is the horizontal summation of the
individual supply curves of the sellers. For example, from the supply curve, SS, we
can know that at p = p1, the market supply of the good is p 1F, or at p = p2, the
market supply is p2K.
Since the supply curves of individual sellers are sloping upwards towards right
owing to the law of supply, the aggregate supply curve as the horizontal
summation of the individual supply curves would also be sloping upwards towards
right or positively sloped, like the SS curve in Fig. 10.14.

The price, p0, of the good that would be obtained at the point of intersection, E, of
the aggregate demand curve, DD, and the aggregate supply curve, SS, would itself
be the equilibrium price of the good. At p = p 0, the market demand and market
supply of the good are equal, both being equal to q = q 0 in Fig. 10.14. That is why,
here p = p0 is the equilibrium price and q = q0 is the equilibrium quantity demanded
and supplied.
If we assume:
(i) That if, at any particular price, the market demand for the good is larger than the
market supply, then the dissatisfied buyers (who cannot buy all they want to buy)
would be willing to pay a higher price for the good and

(ii) That if, at any particular price, the market supply of the good is greater than the
market demand, then the dissatisfied sellers (who cannot sell all they want to sell)
would be willing to accept a lower price for the good, then the equilibrium that
would be obtained at the point E in Fig. 10.14 would be a stable equilibrium.

For, here, if for any reason, the price of the good be more or less than the
equilibrium price, then the behaviour pattern of buyers and sellers mentioned
above ensures that the price would again come back to the level of equilibrium
price, i.e., the market equilibrium will be restored. The two assumptions mentioned
above are known as the behavioural assumptions.

We may illustrate the matter with the help of Fig. 10.14. Here, if the price of the
good be less than p0, if it is p1 < p0, then the quantity demanded would be more
than the equilibrium quantity, q0, and the quantity supplied would be less than q 0.
We shall get this because of the laws of demand and supply.
As a result, there would be excess demand—demand in excess of supply— in the
market. At p = p1, the quantity of excess demand would be FG. In this case, the
buyers are not able to buy what they want to buy, and so they would be willing to
pay a higher price. Consequently, the price of the good would be increasing from
p1 till it becomes equal to p0.
As price increases from p1, the quantity demanded would fall and the quantity
supplied would rise leading to a fall in excess demand and when p rises to the level
of p0, the whole of excess demand would be wiped out and the market would be in
equilibrium.
On the other hand, if the price of the good is p = p 2 > p0, supply in the market
would be in excess of demand, i.e., there would be a negative excess demand in the
market. In this case, the sellers would not be able to sell what they want to sell.
As a result, they would be willing to accept a lower price, and p would be falling.
As p falls from p2, supply would fall and demand would rise leading to a fall in
excess supply. This would go on till p falls to the level of p 0 and market
equilibrium is restored.
We have discussed above how the price is determined in a perfectly competitive
market through the process of interaction between demand and supply for the
good. We have also seen when and why the market equilibrium may be considered
to be stable.

Importance of Time in Price Determination under Perfect Competition:

As we have seen above, price is determined in a perfectly competitive market
through interactions between demand and supply. That is, demand and supply have
an equally important role to play in the process of price determination. According
to the law of demand, as price of the good increases or decreases, the quantity
demanded of it decrease or increases.

Again, because of the law of supply, as price increases or decreases, the quantity
supplied also increases or decreases. We generally assume that if the price of good
changes, its buyers may instantly change the quantity of its purchase. They do not
require any time lag to do this.

On the other hand, if the price of a good changes, then, whether quantity produced
and supplied of it would actually change, and by how much, would depend on the
length of time given for adjustment. For example, if the price of a good increases,
then its producer will want to supply more.

But within a short span of time he might not be able to increase supply as such as
he wished. However, if he is allowed a longer span of time, he might be able to
produce more. This is because, as we know, in the short run, he cannot change the
quantities of the fixed inputs which he may do in the long run.

Now, as we have seen above, the length of time obtained for necessary adjustments
will determine the extent of change in quantity supplied and thereby influence the
price. That is why it is said that time plays an important role in price determination
in a perfectly competitive market. We may discuss the process of price
determination in this market in three phases, depending on the length of time given
for adjustment.

These are price determination:

(i) In the very short period,
(ii) In the short period, and

(iii) In the long period.

(i) Price Determination in the Very Short Period:

Very short period is a short span of time during which the supply of the good,
generally, cannot be changed. For example, the market for a good during the
morning of a day may be called a very short period market.

The supply curve of the good in such a market would be like the SS curve in Fig.
10.15. In this market, since the quantity supplied cannot change in response to a
change in price, most of the supply curve would be a vertical straight line.

However, if the price falls below a certain low level, the sellers might think it
prohibitively low and then, as price decreases further, they might attempt to reduce
the quantity supplied of the good. In Fig. 10.15, this particular price is OR.

This price is known as the reservation price. If the price of the good is smaller than
the reservation price (p < OR in Fig. 10.15), the very short period supply curve
would be backward bending towards the origin like the segment OT of the SS
curve.

For the price of the good equal to or greater than the reservation price (for p > OR),
the supply curve SS would be a vertical straight line, i.e., then the quantity
supplied would be a constant w.r.t. price. In Fig. 10.15, this constant quantity of
supply is q1 (or Oq1).
Now, how small or how large would be the reservation price would depend on
some considerations like the perishability of the good, the sellers’ need for cash,
the probability of the price of the good to change in near future, etc.

For example, the more is the perishability of the good, the more is the sellers’ need
for cash and the more is the probability of the price of the good not to rise in near
future, the smaller would be the reservation price of the good.

In Fig. 10.15, in the initial situation, the demand curve for the good is D 1D1.
Therefore, at the point of intersection, E 1, of the DD1 and SS curves, the very short
period market price of the good, p1, and the equilibrium quantity, q1, would be
determined.
In order to see the importance of time in price determination in a competitive
market, let us suppose that there has been an increase in demand due to some
reason, and the demand curve for the good has shifted to the right from D 1D1 to
D2D2.
At any particular price, demand for the good would now increase, and the buyers
would now be willing to pay a higher price. Consequently, the price of the good
would be rising. Since supply cannot increase in the very short period in response
to a rise in price, price would rise by a relatively large amount from p1 to p’1.
At p = p’1, the demand curve D2D2 has intersected the supply curve SS at the point
E’1(p’1, q1). Therefore, E’1 would be the new point of market equilibrium in the
very short period. Since the supply curve, SS, is a vertical straight line, the shift in
the demand curve would cause the equilibrium quantity bought and sold to remain
constant at q1.
We have seen, therefore, that in the very short period, demand plays an active role
in price determination and supply’s role here would be, at best, passive. If demand
increases in the very short period, only price would change, by a rather large
amount, and, supply would remain constant. The new equilibrium point E’1 would
lie vertically above the initial point E1.
(ii) Price Determination in the Short Period:
Time span in the short period is larger than that in the very short period. We have
already known what we understand by the short period or short run in our
discussion of the theories of production and cost. We know that the firm can
change the quantity of output produced and supplied in the short run by changing
its use of the variable inputs.

Therefore, the firm can increase the quantity supplied of the good in the short run
in response to an increase in its price. In other words, the short-run supply (SRS)
curve of the firm would be sloping upward towards right like the SRS curve in Fig.
10.15.

In Fig. 10.15, the short period market price of the good would be determined at the
point of intersection E2 (p2, q2) between the demand curve D2D2 and the SRS curve.
At the equilibrium point E2, price of the good would be p2 < p’1 and the quantity
bought and sold would be q2 > q1.
That is, in the short period, since supply can respond to a change in price, the
market price would not be as high as the very short period price, viz., p’ 1—it would
fall to p2 in the short period. The short period equilibrium price p = p 2 is called the
short period normal price. As we have seen, the short-run normal price would be
smaller than the very short period market price.

(iii) Price Determination in the Long Period:

The length of the long period is so long that in this period, the firm would be able
to change the quantities used of the fixed factors along with those of the variable
factors to produce a larger or a smaller quantity of output.

We have already seen what is meant by long run or long period in our discussion
of the theories of production and cost. We have also discussed about the long-run
supply (LRS) curve of a perfectly competitive industry.

If we assume that the industry concerned is an increasing cost industry, then its
LRS curve would be sloping upwards towards right like the one shown in Fig.
10.15.
In the long run, since the firm can change the quantities used of both the variable
and the fixed factors, the supply of the good, in response to an increase in its price,
may increase at a larger rate (w.r.t. price) in the long run than in the short run.
Therefore, the LRS curve of the good (or of the industry) would be flatter than its
SRS curve.

In Fig. 10.15, the long-period equilibrium price of the good will be determined at
the point of intersection, E3 (p3, q3) between the demand curve D2D2 and the LRS
curve of the good (or of the industry). Here this price has been p 3. At this price the
quantity demanded and the quantity of long-period supply, both have been equal to
q3.
Here, if long period means one year, then for one year after the increase in
demand, the long-period period price would be diminishing from p 1 till it comes
down to the level of p3 after one year, and the quantity demanded and supplied
would increase from q1 to q3. The price p3 is called the long-period normal price.
Generally, this price would be considerably less than the very short period price pi,
for, in the long run, along with the increase in demand, supply also increases.
Again, the long-run normal price p3 would be smaller than the short-run normal
price p2, because, the LRS curve of the good is flatter than the SRS curve, i.e.,
supply increases at a larger rate in the long run than in the short run.
This is because, in the long run adjustment, the quantities used of both fixed and
variable inputs can change while, in the short run, those of variable inputs only can
change.

Price and Output Determination under Monopoly

Monopoly refers to a market structure in which there is a single producer or seller
that has a control on the entire market.

This single seller deals in the products that have no close substitutes and has a
direct demand, supply, and prices of a product.

Therefore, in monopoly, there is no distinction between an one organization

constitutes the whole industry.
Demand and Revenue under Monopoly:
In monopoly, there is only one producer of a product, who influences the price of
the product by making Change m supply. The producer under monopoly is called
monopolist. If the monopolist wants to sell more, he/she can reduce the price of a
product. On the other hand, if he/she is willing to sell less, he/she can increase the
price.

As we know, there is no difference between organization and industry under

monopoly. Accordingly, the demand curve of the organization constitutes the
demand curve of the entire industry. The demand curve of the monopolist is
Average Revenue (AR), which slopes downward.

Figure-9 shows the AR curve of the monopolist:

In Figure-9, it can be seen that more quantity (OQ 2) can only be sold at lower price
(OP2). Under monopoly, the slope of AR curve is downward, which implies that if
the high prices are set by the monopolist, the demand will fall. In addition, in
monopoly, AR curve and Marginal Revenue (MR) curve are different from each
other. However, both of them slope downward.

The negative AR and MR curve depicts the following facts:

i. When MR is greater than AR, the AR rises

ii. When MR is equal to AR, then AR remains constant

iii. When MR is lesser than AR, then AR falls

Here, AR is the price of a product, As we know, AR falls under monopoly; thus,
MR is less than AR.

Figure-10 shows AR and MR curves under monopoly:

Monopoly Equilibrium:
Single organization constitutes the whole industry in monopoly. Thus, there is no
need for separate analysis of equilibrium of organization and industry in case of
monopoly. The main aim of monopolist is to earn maximum profit as of a producer
in perfect competition.

Unlike perfect competition, the equilibrium, under monopoly, is attained at the

point where profit is maximum that is where MR=MC. Therefore, the monopolist
will go on producing additional units of output as long as MR is greater than MC,
to earn maximum profit.

Let us learn monopoly equilibrium through Figure-11:

In Figure-11, if output is increased beyond OQ, MR will be less than MC. Thus, if
additional units are produced, the organization will incur loss. At equilibrium
point, total profits earned are equal to shaded area ABEC. E is the equilibrium
point at which MR=MC with quantity as OQ.

It should be noted that under monopoly, price forms the following relation
with the MC:
Price = AR

MR= AR [(e-1)/e]

e = Price elasticity of demand

As in equilibrium MR=MC

MC = AR [(e-1)/e]

Monopoly Equilibrium in Case of Zero Marginal Cost:

In certain situations, it may happen that MC is zero, which implies that the cost of
production is zero. For example, cost of production of spring water is zero.
However, the monopolist will set its price to earn profit.

Figure-12 shows the monopoly equilibrium when MC is zero:

In Figure-12, AR is the average revenue curve and MR is the marginal revenue

curve. In such a case, the total cost is zero; therefore, AR and MR are also zero. As
shown in Figure-12, equilibrium position is achieved at the point where MR equals
zero that is at output OQ and price [Link] can see that point M is the mid-point of
AR curve, where elasticity of demand is unity. Therefore, when MC = 0, the
equilibrium of the monopolist is established at the output (OQ) where elasticity of
demand is unity.

Short-Run and Long-Run View under Monopoly:

Till now, we have discussed monopoly equilibrium without taking into
consideration the short-run and long- run period. This is because there is not so
much difference under short run and long run analysis in monopoly.

In the short run, the monopolist should make sure that the price should not go
below Average Variable Cost (AVC). The equilibrium under monopoly in long-run
is same as in short-run. However, in long-run, the monopolist can expand the size
of its plants according to demand. The adjustment is done to make MR equal to the
long run MC.

In the long-run, under perfect competition, the equilibrium position is attained by

entry or exit of the organizations. In monopoly, the entry of new organizations is
restricted.

The monopolist may hold some patents or copyright that limits the entry of other
players in the market. When a monopolist incurs losses, he/she may exit the
business. On the other hand, if profits are earned, then he/she may increase the
plant size to gain more profit.

Monopolistic Competition
In monopolistic competition, the market has features of both perfect competition
and monopoly. A monopolistic competition is more common than pure competition
or pure monopoly. In this article, we will understand monopolistic competition and
look at the features, price-output determination, and conditions for equilibrium.

Monopolistic Competition
In order to understand monopolistic competition, let’s look at the market for soaps
and detergents in India. There are many well-known brands like Lux, Rexona, Dettol,
Dove, Pears, etc. in this segment.

Since all manufacturers produce soaps, it appears to be an example of perfect

competition. However, on close scrutiny, we find that each seller varies the product
slightly to make it different from its competitors.

Hence, Lux focuses on making beauty soaps, Liril on freshness, Dettol on antiseptic
properties, Dove on smooth skin, etc. This allows each seller to attract buyers to itself
based on some factor other than price.

This market has a mix of both perfect competition and monopoly and is a classic

example of monopolistic competition.

Features of Monopolistic Competition

1.  Large number of sellers: In a market with monopolistic competition, there are

a large number of sellers who have a small share of the market.

2. Product differentiation: In monopolistic competition, all brands try to

create product differentiation to add an element of monopoly over the
competing products. This ensures that the product offered by the brand does not
have a perfect substitute. Therefore, the manufacturer can raise the price of the
product without having to worry about losing all its customers to other brands.
However, in such a market, while all brands are not perfect substitutes, they are
close substitutes for each other. Hence, the seller might lose at least some
customers to his competitors.

3. Freedom of entry or exit: Like in perfect competition, firms can enter and exit
the market freely.

4. Non-price competition: In monopolistic competition, sellers compete on factors

other than price. These factors include aggressive advertising, product
development, better distribution, after sale services, etc. Sellers don’t cut the
 price of their products but incur high costs for the promotion of their goods. If
the firms indulge in price-wars, which is the possibility under perfect
competition, some firms might get thrown out of the market.

Price-output determination under Monopolistic Competition: Equilibrium of a firm

In monopolistic competition, since the product is differentiated between firms, each
firm does not have a perfectly elastic demand for its products. In such a market, all
firms determine the price of their own products. Therefore, it faces a downward
sloping demand curve. Overall, we can say that the elasticity of demand increases as
the differentiation between products decreases.

Fig. 1 above depicts a firm facing a downward sloping, but flat demand curve. It also
has a U-shaped short-run cost curve.

Conditions for the Equilibrium of an individual firm

The conditions for price-output determination and equilibrium of an individual firm
are as follows:

1. MC = MR

2. The MC curve cuts the MR curve from below.

In Fig. 1, we can see that the MC curve cuts the MR curve at point E. At this point,

 Equilibrium price = OP and

 Equilibrium output = OQ
Now, since the per unit cost is BQ, we have

 Per unit super-normal profit (price-cost) = AB or PC.

 Total super-normal profit = APCB

The following figure depicts a firm earning losses in the short-run.

From Fig. 2, we can see that the per unit cost is higher than the price of the firm.
Therefore,

 AQ > OP (or BQ)

 Loss per unit = AQ – BQ = AB

 Total losses = ACPB

Long-run equilibrium
If firms in a monopolistic competition earn super-normal profits in the short-run, then
new firms will have an incentive to enter the industry. As these firms enter, the
profits per firm decrease as the total demand gets shared between a larger number of
firms. This continues until all firms earn only normal profits. Therefore, in the long-
run, firms, in such a market, earn only normal profits.

As we can see in Fig. 3 above, the average revenue (AR) curve touches the average
cost (ATC) curve at point X. This corresponds to quantity Q1 and price P1. Now, at
equilibrium (MC = MR), all super-normal profits are zero since the average revenue
= average costs. Therefore, all firms earn zero super-normal profits or earn only
normal profits.

It is important to note that in the long-run, a firm is in an equilibrium position having

excess capacity. In simple words, it produces a lower quantity than its full capacity.
From Fig. 3 above, we can see that the firm can increase its output from Q1 to Q2 and
reduce average costs. However, it does not do so because it reduces the average
revenue more than the average costs. Hence, we can conclude that in monopolistic
competition, firms do not operate optimally. There always exists an excess capacity
of production with each firm.
In case of losses in the short-run, the firms making a loss will exit from the market.
This continues until the remaining firms make normal profits only.

Price Determination Under Oligopoly

An Oligopoly market condition exists between two of the most extreme market
conditions; i.e. perfect competition Market and Monopoly Market. An Oligopoly
market is a type of market condition where there are two-three firms that dominate
the market for a certain type of good or service. In this type of market condition,
there are few companies, and the marketing decisions of each company affect the
other. Hence, it can be said that in an oligopoly market, the marketing decisions of
the competing firms are interdependent. Here, interdependence can be seen in any
kind of decision, say pricing. When one company changes the price of its product
or service, the effect of the change can be seen in the pricing of products and
services of other companies.
Price and Output Determination Under Oligopoly
Price and Output
A determination under the Oligopoly market can be studied under two heads; One
when there is a duopoly and one when there are a few firms. Here, we will discuss
the price determination under Oligopoly in both the conditions:
When There is Duopoly
If in a sector there are only two companies that dominate the market, then such a
condition is called duopoly. In such a market condition if, both the firms have
identical products, they are likely to form a collaboration and make a joint profit. If
in case the products of both the firms are a perfect substitute, then the firm with a
lower cost, better goodwill and better client interaction will attract more customers.
This will force the other company to lose business.

On the other hand, when the offerings of both the companies are differentiated,
then each one has to keep a close watch on the other. In this kind of situation. 

A firm with better quality products and the lesser price will earn abnormal profits.
When There is Oligopoly
In case there are more than two firms in a sector, and each one is considered a key
player in that sector, then such a market is called oligopoly market. If all the firms
produce the same products, then they will always promote collusion. This
collaboration will help them earn profit jointly and would cause no harm to the
other. On the other hand, if the products of all the firms are different, then they can
lower or increase the price without any fear of losing a share in the market.
Theories on Price and Output Determination
No single theory can explain how the price is determined under Oligopoly. Several
theories suggest various ways on how the price determination under oligopoly is
done. Here we will discuss the important theories of price and output
determination.
Cournot’s Model
According to Cournot, Each firm in a duopolist market thinks that instead of its
action and effect on the market, The other firm will keep on producing the
products. The Cournot model suggests that the most profitable pricing is when a
firm’s output is two-third of its competitor’s output, and the price is also two-third.
Stackelberg Model
Under Stackelberg’s model, a leader and follower relationship is formed. The firm
with good brand equity is called the leader, and the one with lower brand equity is
called the follower. The leader decides the price and quality of the commodity, and
then the follower observes the leader and decides the price, to maintain its market
share.
Bertrand Model
Bertrand model can be explained when there exists a symmetry in the industry, i.e.
there are firms which are equal in size and operations. The Bertrand model
suggests that the firms set a low price until the price matches the cost of
production. This is done to dominate the market.
Edgeworth Model
The Edgeworth Model suggests that each firm in a duopoly market thinks that his
competitor will charge the same price, so it changes its price to make a greater
profit. This thinking of the firm keeps the price war continued.
Explanation of Price and Output Determination Under Oligopoly
 Under the oligopoly market, the number of firms varies.
 Sometimes there are 2-3 firms, and sometimes there are 7-10 firms.
 The commodities produced under the oligopoly market may or may not be
homogenous.  
 Sometimes it so happens that firms consult each other before fixing the price
of the commodities, to save each other from losses.
 A firm can never be sure of its rivals' reaction to its decisions.



Determination of Price and Output In Oligopoly

There are various types of markets that exist and oligopoly is one of them.
Oligopoly markets are mostly dominated by suppliers on a small scale. These are
oligopoly markets that are found across the world in many sectors. Some of the
oligopoly markets are competitive whereas some are not that significant. The
authorities for the competition are called upon to supervise the coordinated actions
as well as if there is low competition. Oligopoly markets can exist between the
extreme conditions of a market which is either a perfect competition market or a
monopoly market. It is the market where three are two or three firms that dominate
the market for a good or service. Marketing decisions of each company and other
companies affect one another thus; the oligopoly marketing decisions are
interdependent in an oligopoly market. Interdependence can be any decision e.g.
pricing of a particular product or service. This, in turn, will affect all the pricing of
products and services of the other companies associated with a company.
Price and Output Determination in Oligopoly
There are two conditions under which the price and output determination in an
oligopoly can be done. They are:

1. In the case of duopoly

2. In the case of fewer firms

In the case of duopoly, which means two companies that dominate the market in a
sector and the firms have similar products. In such cases, the two firms or
companies will form a collaboration with each other and have a joint profit. The
firm which provides products with lower prices will attract more people and have
better client associations. This can cause losses to the other company. On the other
hand, if the companies have slightly different products, the firm which provides
products of better quality with a low price will gain large profits.

In the case of fewer firms, each company is an essential player in that sector. Here,
the collaboration will help both the companies and there won’t be a loss for either
of them. When the products of the companies are different then they may increase
or decrease the pricing without having the fear of losing shares in the market.

What is a Monopoly

When looking at the causes of monopoly, it is important to first define what it is.
The term monopoly originates from the Ancient Greek language. Monos, meaning
“sole”. And Poleo, meaning “sell”. Roughly translated, it means “Sole Seller”. Any
person or business who is the only seller in the market could be classified as
having a monopoly.

Monopolies are known as big companies that tend to take advantage of the
consumer. They tend to use their position to set prices that are in excess of what
the consumer would normally pay in a competitive market. As a result, they are
usually heavily regulated in order to prevent unreasonable practices that take
advantage of the consumer.

3 Types of Monopoly

There are three types of monopoly: Natural, Un-natural, and State. All three have
unique characteristics and causes.

1. Natural Monopolies
One type of monopoly is the natural monopoly, which is called ‘natural’ because
there is no direct government involvement. This derives from the fact that its
creation originates from variables that are not man-made.
For instance, railways are a prime example of a natural monopoly. This is because
the cost to build another track would be over and above what a competitor would
make back in profit.

Utilities are another example. To build new sewers or power lines would be costly,
inefficient, and impractical. If two companies were to build and offer separate
lines, the costs would be higher than what they would be under a monopoly.
Therefore, other firms do not want to enter the market because there is no profit to
be made.

In short, natural monopolies exist because it is able to provide a product or service

at a lower cost than a competitive market would offer. In part, this is due to the
efficiencies that economies of scale offers. For instance, utilities, railways, and
other such industries can offer a service or product at a price that is lower than
what would be achieved if there was competition.

With more competitors, there is competition over customers and resources, which
pushes up prices beyond what the customer would be willing to pay. Therefore,
there would be no point in conduction business with multiple competitors.

2. State Monopolies
Another type of monopoly is the state monopoly. This covers industries where the
state has full ownership. Notable examples include postal services, utilities,
television, and the supply of money. These are usually controlled by the state as
they are deemed as ‘natural’ monopolies. In other words, the goods could only be
efficiently provided under a monopoly structure. Therefore, rather than trust a
private firm to run them, they are taken under government ownership instead.

The aim of state ownership is to prevent price gouging that private monopolies
would participate in. As monopolies have greater power to dictate prices, they may
increase the cost to the consumer over and above the market rate.

Some governments regulate these monopolies instead, but in many countries, there
is a strong political will to have these controlled by the state. In the UK for
example, the re-nationalization of the railways has become increasingly popular in
order to reduce ticket prices.

3. Un-natural Monopolies
The third type of monopoly is un-natural monopolies which are a combination of
natural and state monopolies. They are natural monopolies in the traditional sense
but are re-enforced by the state. Patents are a clear example of an unnatural
monopoly.

A private firm creates a new product. This may be completely different from
whatever is on the market. For example, a new medical drug, that can reverse the
effects of Alzheimer’s. Nothing else is available to the consumer. So this drug has
a monopoly within the market.

It is naturally occurring as it is the first and only product on the market. However,
this product is given an artificial monopoly through the patent system. For a certain
period of time, this will be the only product customers can buy.

How to Control Monopolies? (6 Measures) 

Some of important measures are:
1. Anti Trust Legislation:
One of the measures which is adopted by the monopoly is to form trusts. These
trusts are of course voluntary, but all the evils of monopoly more or less creep into
it, with the result that the State is forced to take legislative measures.

In 1890 in the USA, Sherman Anti Trust Law was passed. Similarly in 1914
Olayton Anti Trust Law was passed. But many a time monopolists are very active.
They try to undo the work of the state by either combining in another form or by
reaching some informal understanding.

2. Control over Prices:

Monopoly will always try to fix the highest possible price which it can obtain from
the customers, so as to earn minimum profit. The state can control the monopoly
by fixing the profits and the prices and ensure that the industry does not earn undue
profit. But it is also not very effective and cannot be put into actual practice.

We know that it is very difficult to determine the cost of production, because the
monopoly will never give a correct picture. Similarly, it will also not like to leak
out trade secrets. Then it is also difficult to have some margin of profit uniformly
for all commodities, all over the country.

3. Organised Consumer’s Associations:

The monopoly fixes high prices because it knows it fully well that the consumer is
not well organised and will take time to organise himself and till then suffer. One
effective method of checking and controlling monopoly is that the Government
should help in the formation of consumers associations.

It should give them some reasonable powers and patronage. It should be vested
with the responsibility of bringing to the notice of the Government on the one hand
and the society on the other, high handedness of the monopoly. But this proposal
too is complex and complicated.

The monopoly will always try to see that the consumers associations are not
formed. They will always try to put many hurdles on the way, even if the
association comes up, the monopoly will see that it is not forceful arid powerful.
Then another difficulty is that the consumers are spread all over the country and it
is usually very difficult to bring them nearer and closer to each other and that too
in an effective manner.

4. Effective Publicity:
Monopoly works with some serious irregularities, which usually do not come to
the notice of the people. It is therefore, desirable that proper publicity should be
given to these defects. There should be provision for public supervision of
monopoly houses.

In the words of Prof. Pigou, “Under any form of state control over private
monopoly a considerable gap between the ideal and the actual is likely to remain.
The method of control whether positive or negative is in short, an exceedingly
imperfect means of approximating industry towards the price level and output
proper to simple competition. Moreover, it is apt to prove a costly method.”

5. Creating Fair Competitions:

Monopoly can continue only as long as there is no real competition. This

competition must be effective, if monopoly conditions are to be checked. But the
difficulty is that the monopoly will never allow any competition, because that will
mean sharing in profits on the one hand and check on arbitrary fixation of prices on
the other.

Monopoly check competition in more than one way e.g.:

(a) It will see that those who come in competition are discouraged. Their resources
of supply are cut, and the suppliers are bribed and so on.

(b) When the rivals come in the market, the prices of the commodity are drastically
reduced in the name of efficiency and economic production and for benefiting the
consumers; this will force the newly emerging competitors to go out of the market.

(c) The monopoly will try to set up new firms to compete the new rival at all
levels. The firms will be allowed to suffer losses for sometime. These will be
wound up only after the competitor has gone out of the market.

(d) The suppliers of raw material, distributors and dealers will be given better
terms for sometime.

In this way the monopoly will make every effort to see that competitor goes out of
the market.

6. Nationalisation:
The last resort of the Government is that it should nationalise the business, in
which monopoly exists and which the society is not willing to tolerate. But again
the difficulty with this system is that the Government has limited economic
resources and can nationalise only a few industries.
Similarly while nationalising it is to take into consideration nature of the
commodity. If it is of public utility then it may go in for nationalisation
immediately otherwise it may be forced to wait for nationalisation, till such time,
as the resources are available.

Thus it is very difficult to really effectively either check or control the monopoly.
The only effective method is creation of fair competitions. The task is quite
difficult, but once that has been created, monopoly can be most effectively
checked.

7. Regulations through Taxation:

Imposition of tax:
The Govt. can regulate monopoly through taxation. Govt. can levy a tax per unit of
output (Specific Tax) or impose a lump sum tax irrespective to its output.

8. Marginal Cost Pricing or Price Regulation or Regulated Monopoly:

The term “public utilities” is applied to such essential services such as water
supply, power supply, passenger transport facilities, communication facilities and
railway facility. These services should be made available to the society at
reasonable prices. Most public utility firms are natural monopolies and are also
called as regulated monopolies.

Government and public authorities run these monopolies directly or impose price
ceilings, which are not too low from monopoly price. This saves the consumers
from having to pay high monopoly prices. This limits monopoly power

9. Peak Load Pricing:

This is a case of price discrimination peak and off-peak supplies at different prices.
Some examples are, electricity has different demand curves at different times
during the day. When demand is more, it is called peak period, when less the off-
peak period. Hotels at hill stations have peak period in summer and off-peak period
in monsoon. Demand for woolens is more in winter (peak period) and less in
summer (off- peak period). The traffic rush on roads is more after office hours.

Weekend rush to amusement parks is another example of peak period. Hence,

whenever the demand for a good is not the same in the two time periods and the
cost to produce also differs, it is beneficial for the monopolist to charge different
prices in the two periods The cost is higher in peak period because resources are
pushed much harder to produce more in peak period.

Business organizations

Business organizations, as known, are the places where the businesses are
conducted. What is probably not known is – there can be a varied type of 10
business structures! While the most prevalent six to seven forms of business
organizations will be prioritized in this discussion.

Knowing about the business organization is the utmost for a business aspirant
student as this is the basic fundamental by which he or she may decide to structure
his or her own business. Thus, let us delve into the subject matter and know the
various forms of business organizations. 

Factors Affecting the Business Forms 

Business organizations can be of different types, depending upon factors like their
nature, the extent of operation, ownership, legalities, terms, financial structure,
liabilities, etc. The form of a business is likely to have long-term impacts on the
company. Thus, the members of an organization must choose wisely as to which
sort of business would be ideal for them.

The primary aspect, based on which forms of business organizations are decided, is
its characteristics. Various factors determining the character of business include:

1. Ease of Formation
2. Capital or Financial Requirements
3. Nature of Liability
4. Control
5. Stability and Continuity
6. Flexibility to Conduct Operations.
7. Secrecy
8. Legal Aspects
 
The Types of Business Structures

Depending on the factors mentioned above, there can be seven different forms of
business organizations. They are as follows:

1. Sole Proprietorship
2. Hindu Undivided Family
3. Company
4. Partnership
5. Co-operative Societies

Sole Proprietorship

Sole Proprietorship in simple words is a one-man business organisation.

Furthermore, a sole proprietor is a natural person(not a legal person/entity) who fully
owns and manages this type of entity. In fact, the business and the man are the same,
it does not have a separate legal entity.

In addition, a sole proprietorship usually does not have to be incorporated or

registered. Thus, it is the simplest form of business structure and the ideal choice to
run a small business or medium scale business. Let us look at some important
features of a proprietorship.

Features of Sole Proprietorship

1] Lack of Legal Formalities

A sole proprietorship does not have a separate law to govern it. And so there are not
many special rules and regulations to follow. Furthermore, it does not require
incorporation or registration of any kind. In fact, in most cases, we need only the
license to carry out the desired business.
And just like in its formation, there is hardly any legal process involved in its closure.
All in all, it allows for ease of doing business with minimum hassles.

2] Liability
Since there is no separation between the owner and the business, the
personal liability of the owner is also unlimited. So if the business is unable to meet
its own debts or liabilities, it will fall upon the proprietor to pay them. For instance,
he may have to sell all of his personal assets (like his car, house, other properties etc)
to meet the debts or liabilities of the business.

3] Risk and Profit

The business owner is the only risk bearer in a sole proprietorship. Since he is the
only one financially invested in the company. As a result, he must also bear all the
risk. In other words, if the business fails or suffers losses he will be the one affected.

However, he also enjoys all the profits from the business. He does not have to share
his profits with any other stakeholders since there are none. So he must bear the full
risk in exchange for enjoying full profits.

4] No Separate Identity
In legal terms, the business and the owner are one and the same. No separate legal
identity will be bestowed upon the sole proprietorship. So the owner will be
responsible for all the activities and transactions of the business.

5] Continuity
As seen above the business and the owner has one identity. So a sole proprietorship is
entirely dependent on its owner. The death, retirement, bankruptcy. insanity,
imprisonment etc will have an effect on the sole proprietorship. In such situations, the
proprietorship will cease to exist and the business will come to an end.

Advantages of Sole Proprietorship

 A proprietor will have complete control of the entire business. Thus this will
facilitate quick decisions and freedom to do business

 Law does not require a proprietorship to publish its financial accounts or any
other such documents to any members of the public. As a result, there is
enough confidentiality which is important in the business world

 The business owner derives the maximum incentive from the business. Because

he does not have to share any of his profits. So the work he puts into the
business is completely reciprocated in incentives

 Being your own boss is a great sense of satisfaction and achievement.

Moreover, you are answerable only to yourself. Hence it is a great boost to your
self-worth as well

Disadvantages of Sole Proprietorship

 One of the biggest limitations of a sole proprietorship is the unlimited personal

liability of the owner. If the business fails it can wipe out the personal wealth of
the owner as well as affect his future business prospects too

 Another problem is that a sole proprietor has access to limited capital. The
money he can borrow from his own personal savings may not be enough to
expand the business. Moreover, banks and financial institutions are also wary of
lending to proprietorships.

 The life cycle of a sole proprietorship is undecided and attached to its owner.
An incapacitated owner may have a negative effect on the business, and it may
even lead to the closure of the business. A sole proprietorship cannot carry on
without its proprietor.

 A sole proprietor also has limited managerial ability. He cannot be an expert in

all the fields of the business. Furthermore, limited resources may mean that he
cannot hire competent people to help him out. As a result, the business may
suffer from mismanagement and poor decisions.

Partnership Definition
A partnership is an arrangement where parties, known as business partners, agree to
cooperate to advance their mutual interests. The partners in a partnership may be
individuals, businesses, interest-based organizations, schools, governments or
combinations.

Partnership

In India, we have a definite law that covers all aspects and functioning of a
partnership, The Indian Partnership Act 1932. The act also defines a partnership as
“the relation between two or more persons who have agreed to share the profits from
a business carried on by either all of them or any of them on behalf of/acting for all”

So in such a case two or more (maximum numbers will differ according to the
business being carried) persons come together as a unit to achieve some common
objective. And the profits earned in pursuit of this objective will be shared amongst
themselves.

The entity is collectively called a “Partnership Firm” and all the individual members
are the “Partners”. So let us look at some important features.

Features of a Partnership

1] Formation/Partnership Agreement
A partnership firm is not a separate legal entity. But according to the act, a firm must
be formed via a legal agreement between all the partners. So a contract must be
entered into to form a partnership firm.

Its business activity must be lawful, and the motive should be one of profit. So two
people forming an alliance to carry out charity and/or social work will not
constitute this form of organisation. Similarly, a partnership contract to carry out
illegal work, such as smuggling, is void as well.
2] Unlimited Liability
In a unique feature, all partners have unlimited liability in the business. The partners
are all individually and jointly liable for the firm and the payment of all debts. This
means that even personal assets of a partner can be liquidated to meet the debts of the
firm.

If the money is recovered from a single partner, he can, in turn, sue the other partners
for their share of the debt as per the contract of the partnership.

3] Continuity
A partnership cannot carry out in perpetuity. The death or retirement or bankruptcy
or insolvency or insanity of a partner will dissolve the firm. The remaining partners
may continue the partnership if they so choose, but a new contract must be drawn up.
Also, the partnership of a father cannot be inherited by his son. If all the other
partners agree, he can be added on as a new partner.

4] Number of Members
As we know that there should be a minimum of two members. However, the
maximum number will vary according to a few conditions. The Partnership Act itself
is silent on this issue, but the Companies Act, 2013 provides clarity.

For a banking business, the number of partners must not exceed ten. For a business of
any other nature, the maximum number is twenty. If the number of partners increases
it will become an illegal entity or association.

5] Mutual Agency
In this type of organisation, the business must be carried out by all the partners
together. Or alternatively, it can be carried out by any of the partners (one or several)
acting for all of them or on behalf of all of them. So this means every partner is an
agent as well as the principal of the partnership.
He represents the other partners in some cases so he is their agent. But in other
circumstances, he is bound by the actions of any of the other partners aking him the
principal as well.

Types of Partners

Not all partners of a firm have the same responsibilities and functions. There can be
various types of partners in a partnership. Let us study the types of partners and their
rights and duties.

 Active Partner: As the name suggests he takes active participation in the

business of the firm. He contributes to the capital, has a share in the profit and
also participates in the daily activities of the firm. His liability in the firm will
be unlimited. And he often will act as an agent for the other partners.

 Dormant Partner: Also known as a sleeping partner, he will not participate in

the daily functioning of the business. But he will still have to make his share of
contribution to the capital. In return, he will have a share in the profits. His
liability will also be unlimited.

 Secret Partner: Here the partner’s association with the firm is not public
knowledge. He will not represent the firm to outside agents or parties. Other
than this his participation with respect to capital, profits, management
and liability will be the same as all the other partners.

 Nominal Partner: This partner is only a partner in name. He allows the firm to
use the name of his firm, and the attached goodwill. But he in no way
contributes to the capital and hence has no share in the profits. He does not
involve himself in the firm’s business. But his liability too will be unlimited.

 Partner by Estoppel: If a person makes it out to be, through their conduct or

behaviour, that they are partners in a firm and he does not correct them, then he
becomes a partner by estoppel. However, this partner too will have unlimited
liability.
There can be general partnership with general partners, limited partnerships (or
limited liability partnership) etc.

Advantages of Partnership

The partnership offers a lot of advantages, and some of the main benefits are
discussed below:

1. Easier formation: It is straightforward to form a partnership business. It

requires fewer legal formalities, and the cost is also low. The registration of
the firm is also not required to create a partnership business. Only the partners
should have an agreement between them.
2. Flexibility: A partnership firm has minimum legal formalities and is also free
from government control. Hence, the partners can make changes in the firm
according to their preferences. They can make changes in the size of the
capital, the size of the business, and the management structure without any
excess legal procedures. When it is necessary, the partners can make
decisions in the firm based on the external environment changes.
3. Risk sharing: A partnership firm usually has a lot of members. Since the
members agree to share profits and losses equally, the risk is also shared by
all the members. As a result, compared to a sole proprietor, the burden of risk
on each partner is much lower. Due to less load, the partners are motivated to
take up riskier projects with higher profit margins
4. Privacy: It is not required for a partnership firm to publish its accounts. As a
result, the affairs taking place in the business remain within the business.
Also, the partners are the ones who carry out the significant decisions of the
business, and hence there is no chance of leakage of trade secrets, and the
privacy of the firm is maintained.
5. Division of work: In a partnership, all the firm’s work is divided among the
partners based on their knowledge and skills. Division of labor is possible in
partnership. This division of work leads to efficient management, which
results in higher profits.
6. More expansion scope: A partnership has a more expansive scope than a
sole proprietorship business. In a partnership firm, the partners can arrange
 more considerable funds from their capital and their borrowings. The
partners also have good managerial skills. Their organizational skills are also
used for expansion and efficiency.
7. Easier dissolution: The dissolution of a partnership does not require any
legal procedure. Insolvency or lunacy, or the death of a partner, can result in
the dissolution of the firm. Therefore, it is easy and cheap to dissolve a
partnership.

Disadvantages of Partnership

1. Unlimited liability: In a partnership business, the partners agree to share all

the losses and profits between them. The partners are also entitled to take
responsibility for all the debts, even if they are not their debts. The liability of
all the partners is not limited. This is usually a burden on the personal
properties and finances of the partners.
2. Blocking of capital: If a partner wishes to withdraw their wealth from the
firm, they can not do so alone. If the other partners agree to it, only then is
withdrawal possible. The partners are also not allowed to transfer their shares
to someone else. If someone wants to do so, then they must get the consent of
the other partners. As a result, they lose the liquidity of their investment. This
is one of the significant reasons that discourage people from investing in a
partnership.
3. Uncertainty: A partnership business suffers from instability. Insanity,
insolvency, retirement, and the death of a partner may result in the sudden
end of the business. Other than the causes mentioned above, a partner can
also notice the business’s dissolution to the other partners. As a result of all
these instabilities, it has become difficult to do long-range planning and
innovative ideas for business.
4. Lack of public trust: The public has less confidence in partnership firms
since their annual reports and accounts are not published. Therefore, the
public does not trust their dealings.
5. Difficulty in decision making: In a partnership business, the consent of
every partner is needed before making a decision. From minor to major, all
decisions require the approval of all partners. The acceptance of all partners
 is needed for policy-making choices as well. As a result, the partners are
unable to make spontaneous or quick decisions regarding the firm.
6. Mutual differences: The details, records, and secrets of a partnership firm
are known by all the partners. If a mutual conflict arises among the partners,
there is a high chance of information leakage regarding the firm. The
partners may pass the secrets of their firm to other competitors.

Joint Hindu Family Business

The Joint Hindu Family Business or the Hindu Undivided Family (HUF) is a
unique form of business organisation found only in India. Nowhere else in the world
is this a legal form of business entity. Let us learn about this form of organisation and
its unique features.

Hindu Undivided Family (HUF)

The Joint Hindu Family Business or the Hindu Undivided Family (HUF) is a unique
type of business entity. It is governed and dictated by the Hindu Law, which is one of
the several religious laws prevalent in India.

So who all are members of such an organization? Well, any person born into the
family (boy or girl) up to the next coming three generations is a part of the HUF.
These members are the co-parceners. The head of such a Joint Family Business is the
eldest member of the family, the “Karta”. He is the main person responsible for the
business and the finances.

Features of a HUF

 Formation: To begin a Hindu Undivided Family there must be a minimum of

two related family members. There must be some assets, business or ancestral
property that they have inherited or will eventually inherit. The formation of a
HUF does not require any documentation and admission of new members is by
birth.
 Liability: The liability of all the various co-parceners is only up to their share of
the property or business. So they have limited liability. But the Karta being the
head of the HUF has unlimited liability.

 Control: The entire control of the entity lies with the Karta. He may choose to
confer with the co-parceners about various decisions, but his decision can be
independent. is actions will be final and also legally binding.

 Continuity: The HUF can be continued perpetually. At the death of the Karta,

the next eldest member will become the Karta. However, keep in mind a Hindu
Undivided Family can be dissolved if all members mutually agree.

 Minority: As we saw earlier the members are eligible to be co-parceners by the

virtue of their birth into the family. So in this case, even minor members will be
a part of the HUF. But they will enjoy only the benefits of the organisation.

Advantages of the HUF

 A Hindu Undivided family is comprised of family members running a business.

Like any other organisation, there is scope for disagreements and conflicts. But
since the Karta has absolute power and takes all decisions by himself, it will
lead to effective management.

 Just like a company, the existence of a HUF is perpetual. The death or

retirement of one member of even the Karta will not affect it, and it will
continue on.

 Since the co-parceners do not have any effective control over

the management of the HUF, and all power lies with the Karta, the liability of
the members has also been limited to only their share of the property. This
keeps the balance between power and responsibility.

 Also since all members of the HUF are relatives and members of the same
family, there is a sense of loyalty and cooperation. The trust among members is
also there and leads to overall cooperation.
Disadvantages of the HUF

 No outside members other than family members can be introduced to the HUF.
This makes it very difficult to get additional capital from the market. With
limited capital, the chances of expansion are very low. It limits the scope of the
business.

 While the Karta has all the power he also has the burden of unlimited liability.
This may make him overly cautious and timid in his business dealings. In turn,
the business could suffer. Another factor is that he may even be held
responsible for the actions of other members.

 Also, the absolute dominance of the Karta overall business and financial
decisions make cause conflict among the HUF. His decisions and business
acumen may be questioned by other members, and cause issues within the
HUF.

 Another issue may be that the Karta may not be the most qualified person to
lead the business. The position is given to the senior most family member,
whether he is the most qualified or not is not taken into consideration.

Cooperative Society
The word “cooperative” means to work together and cooperate with each other,
similarly, in a cooperative society, a group of people forms a voluntary
association to benefit the members and work for the betterment of society,
especially for the weaker sections. The members of a cooperative society raise
the capital through the issue of shares, and the members themselves purchase
those shares. The main aim is to protect the economic interest of the people by
eliminating the middlemen. One of its major functions includes providing loans at
a low rate of interest to its members and weaker sections of society.  A
cooperative society works with the aim of self-help basically for its members. It
requires the agreement of at least ten adult members to form a society. For the
smooth functioning of a cooperative society, an act was formed, and each
cooperative society is governed by the rules and regulation of the act called “The
Cooperatives Societies Act 1912”. After successfully registering a Cooperative
Society under the said Act, it acquires a distinct legal entity.
Features of Cooperative Society
 
1. Separate legal entity
As registration of a Cooperative Society is compulsory, it has a separate legal
entity that is distinct from its members. After registration, a cooperative society
can hold property in its name and can enter into contracts, can sue, and be sued
by others. All the transactions taking place in a cooperative society will be under
the name of the society and not in the name of its members. As it holds a separate
legal identity, it is not affected by the entry or exit of its members. 
2. Democratic 
The major decisions of a cooperative society are handled by an elected managing
committee. The members of a cooperative society have the power to choose the
members of the managing committee, which gives rise to the role of democracy.
The members can choose their representatives as they have voting rights.
3. Limited Liability 
A cooperative society is a convenient form of association in which the liability of
any member is limited to the extent of capital contributed by them. Therefore,
with minimum risk, any member can protect their economic interest through a
cooperative society.
4. Free Entry and Exit
A cooperative society is a voluntary association; therefore, an individual is free to
join or leave the society according to their will. It works according to a
democratic society, i.e., it is open to all irrespective of their caste religion and
gender.
5. Social Welfare
A cooperative society works for the economic welfare of poor or weaker sections
of society. Its main aim is to eliminate middlemen and protect the interest of its
members and society. Hence, it can be said that a cooperative society works for a
service motive. If any surplus is left, then it is distributed amongst its members as
a dividend according to the rules and procedures of the society.
Merits of Cooperative Society
 
1. Easy to form
There are no big formalities for the formation of a Cooperative Society.
Moreover, it is voluntary, so there is no compulsion to any organization person or
business associate to form, and join any cooperative society. A minimum of ten
members can start a cooperative society and there’s no limit to the maximum
number of members in a cooperative society.
2. Limited Liability
The risk factor of members is limited to the extent of capital brought by them in
the cooperative society. In case of insolvency or dissolution, the personal assets
of the members are not liable for repayment of debts, which makes the members
of a cooperative society feel safe and protects their economic interests.
3. Stability
As the cooperative society holds the position of a separate legal entity, it is not
affected by the death, retirement, or admission of any member. A cooperative
society is not much affected by its members as they have to work on the basis of
the rules and regulations provided in the act. Even though members have a voting
right in choosing the managing committee member, it does not have much effect
on the working of the business. 
4. Equality in Voting Right 
Each member in a cooperative society has one vote to elect the member of the
managing committee, as it follows the principle of ‘ONE MAN ONE VOTE’.
Every member has an equal voting right, no matter whether they have contributed
less or huge capital to the business. Having a say in the matters of the business
also puts a great emphasis on them. Besides, a cooperative society is a democratic
association, which means that it treats everyone the same irrespective of their
caste, gender, or creed. 
5. Support from the Government
As a cooperative society works majorly for the benefit of poor and weaker
sections of the society, it gets great support from the government in the form of
low taxes, subsidies, loans with low rates of interest, etc.
Demerits of Cooperative Society
 
1. Conflict and Disputes
As the members of a cooperative society belong to different cultural and social
aspects their thinking varies, which leads to a greater possibility of conflicts.
Members try to make personal gains and keep aside the service motive, which
hampers the working of a cooperative society. In other words, the difference in
personal motive and social motive of the members of the society results in
conflicts among them affecting the overall business.
2.  Lack of Privacy
As there are different members in a cooperative society, it is difficult to maintain
a level of secrecy. Every decision is taken in a meeting with an open discussion,
which makes it difficult to maintain confidentiality about the operations of the
business. Besides, a cooperative society has an obligation to disclose the
decisions of the meeting under the Societies Act (7).
3. Lack of Efficiency 
It is difficult for the cooperative society to earn and make a profit on a large scale
because it works for welfare motive. The amount of profit earned by the society
is not sufficient to appoint skilled and experienced members for proper
management. Even if any of the members agree to give honorary services to the
cooperative societies, they do not have sufficient means to handle it well. 
4. Government Control
When a cooperative society grows and develops into a big unit, then the
government would interfere in its operations. The cooperative society has to
comply with rules and regulations related to auditing of accounts, profit, etc.,
which affects the freedom of operations.
5. Limited Resources
Each member brings limited capital and expects a higher return, which is difficult
for a cooperative society to provide at an early stage. Moreover, it is formed for
the welfare of society and its members; therefore, the profit motive is ignored to
some extent.
Types of Cooperative Societies
1. Producer’s Cooperative Societies
Many small producers want to produce on a large scale, but they lack in monetary
terms and cannot meet their goals. The Producer’s Cooperative Society works for
those producers who want to sell products on a large scale, but do not have the
required resources. In Producers’ Cooperative Societies, the members are the
producers and they collectively produce the goods and meet the demands of
consumers. This society is formed to fight against the capitalist section of society,
which has large capital and a lot of resources. It works as a supplier and as a
buyer for raw materials, overheads and other equipment. Generally, profit is
distributed amongst the members according to their investment in the resources.
2. Consumer’s Cooperative Societies 
Such societies are formed for the welfare of consumers, and it comprises those
members who are willing to pay reasonable prices for good quality products. It
purchases products directly from the wholesalers, eliminates the middlemen, and
sells the goods directly to the consumers. If there is any profit from the sales, it is
distributed amongst the members according to their capital contribution or
purchases made by each of the members. In simple terms, a consumer’s
cooperative society protects the interests of consumers. 
3. Farmer’s Cooperative Societies
The farmers, who are willing to produce on a large scale, form a cooperative
society and jointly take up the farming activities. Anything produced in bulk
would cost less. The main aim of a Farmer’s Cooperative Society is to earn a
profit by increasing productivity through less cost. When different farmers join
together, they get an opportunity to combine their land, which solves the problem
of fragmented landholdings. These societies focus on modern methods of
farming, HYV seeds, fertilizers, machinery, and other modern equipment, which
help in improving the yields and return. 
4. Credit Cooperative Societies
The Credit Cooperative Societies provide economic assistance to its members by
providing loans at a low rate of interest. Its main aim is to protect loan seekers
from the exploitation of money lenders, who charges a high rate of interest on the
loan. These loans are provided to the members out of the amount collected by
them as capital at a low rate of interest. This helps the members in getting easy
credits.
5. Cooperative Housing Societies
Cooperative Housing Society works for those who want to construct houses for
themselves, but do not have the required money for such construction and
procurement. It offers the members to pay the amount in installments and provide
them with the desired plot or land on which the members could construct the
house according to their choice. There are different types of housing societies,
some build new houses, some are formed to buy existing properties, and others
upgrade houses and infrastructure.
6. Marketing Cooperative Societies
A Marketing Cooperative Society consists of producers who want to get a
reasonable amount for their produce. Therefore, this society helps these small
producers by pooling the amount contributed by each of the members and
performing functions like warehousing, packaging, transportation, etc. The major
aim of a marketing cooperative society is to remove the middlemen from the
chain of distribution and improve the competitive position of the producer
members. The profits earned through the sale of these products are distributed
among the members of the society as per the amount contributed by them to the
pool of output. 

Types of Companies
Not all companies are the big multinational and large companies to see around you.
The Companies Act, 2013 has described various types of companies that can be
incorporated in India. Here we will be focussing on two major types of companies,
the Private Company and Public Company.

Types of Companies

Private Company
This is a type of company that finds mention in the Companies Act, 2013. The
purpose of private companies is when the business is not very large, but the
owners/management still want to opt for a company over
a partnership or proprietorship. Let us look at some of the features/characteristics of a
private company.

 Minimum numbers of members required to incorporate a private company are

2. There is also a maximum limit of 200 members. However, joint members of
shares are counted as one member.

 The minimum paid-up capital for a private company has been kept at one lacs.
There is no maximum limit in this case.

 Transferability of shares by its members is restricted. Such transfers are not

absolutely prohibited, but there are certain restrictions put by the Companies
Act. This is to avoid takeovers by larger companies and multinationals and
ensure the sanctity of private companies

 Private companies under no circumstances can accept deposits from the public.

It cannot invite members of the public to subscribe to its shares either.

 The number minimum of directors to be appointed are 2. No independent

directors are required.

Privileges of a Public Company

Now a private company under the Companies Act enjoys certain privileges over a
public company. Since a private company does not take deposits from the public,
certain rules have been relaxed in their favour. Let us take a look at all the privileges
that private companies enjoy.

 The minimum number of members are restricted to 2. So it does not require

many promoters to start a private company.

 Since the members of the public are not invited to subscribe shares there is no
need to issue a prospectus on any such similar document.
 There is no need to wait for a minimum subscription amount to be received.
The members can allot shares within themselves and immediately incorporate
the company.

 While incorporation with the registrar of companies is compulsory, there is no

commencement certificate in the case of private companies. The business can
start functioning immediately after receiving the certificate of incorporation.

 In case of a private company, there is no need to maintain a register

of shareholders.

 It can allot any type of shares to its members. even shares with differential
voting rights which are prohibited for public companies.

 Its financial accounts are not accessible by any member of the public. It can

maintain some secrecy in the matter.

 The directors need not retire by rotation and there is no limit on their
remuneration as well.

Public Company

In simple terms, a public company is a company whose shares can be subscribed by

members of the public. As per the Companies Act, 2013 a public company is

 A company that is not a private company

 Has a minimum of seven members, no maximum limit is mentioned

 Has a minimum paid-up capital of five lacs, again there is no maximum limit

 A private company that is a subsidiary of a public company, will be considered

a public company
There are certain documents required to be filled by a public company with the
Registrar of companies, so let us take a look at these documents
  Memorandum of Association: This is the constitution of a company. States the
objective of the company, the total capital, the name of the company, the
registered address etc.

 Articles of Association: This document contains rules and regulations of the

internal management of the company.

 Prospectus: Because the company wishes to invite funds from the public it must
register and issue a prospectus or a document in liu of a prospectus. Any
material misstatement in the prospectus by the directors, promoter, or the
experts is a criminal liability.

Point Private Company Public Company

Paid-up Capital Minimum paid-up capital of Rs Minimum paid-up capital of Rs

1.00.000/- 500.000/-

No. of Members Minimum 2 members and maximum Minimum 7 members, no max limit
200

Name of Name must end in “private limited” Name must end in “public limited”
Company

No. of Directors Minimum two directors, and no need Minimum 3 directors, and if listed
for independent directors company one-third must be
independent

Managerial There are no restrictions Restricted to 11% of the Net profit of

Remuneration the company
Quorum of Minimum two members, present in Quorum will depend on the total
Meetings person number of members of the company

Public offer Private companies cannot have public Public offers must be in the demat
offers for shares form only

Accepting Not allowed according to the act If paid capital exceeds 100 crores, or
Deposits turnover exceeds 500 crores, the
company can accept public deposits

Advantages:
The important advantages of company form of ownership are as follows:
1. Limited Liability:
The liability of shareholders, unless and otherwise stated, is limited to the face
value of shares held by them or guarantee given by them.

2. Perpetual Existence:
Deaths, insanity, insolvency of shareholders or directors do not affect the
company’s existence. A company has a separate legal entity with perpetual
succession.

3. Professional Management:
In company business, the management is in the hands of the directors who are
elected by the shareholders and are well experienced persons. In order to manage
the day-to-day activities, salaried professional managers are appointed. Thus, the
company business offers professional management.

4. Expansion Potential:
As there is no limit to the maximum number of shareholders in a public limited
company, expansion of business is easy by issuing new shares and debentures.
Companies normally use their reserves for expansion purposes.
5. Transferability of Shares:
If the shareholders of a company are displeased with the progress of the business,
they can sell their shares any time. During all this change of ownership, the
business continues to operate.

6. Diffusion of Risk:
As the membership is very large, the whole business risk is divided among the
several members of the company. This is an advantage particularly for small
investors.

Disadvantages:
In spite of its several advantages, the company form of ownership also suffers
from some disadvantages.
The important ones are:
1. Lack of Secrecy:
As per the legal provisions, a company has to make various statements available to
the Registrar of the Companies, Financial Institutions; the secrecy of business
comes down. It is further reduced when the company provides its annual report to
the shareholders as the competitors do also find out the details of all financial data.

2. Restrictions:
Compared to proprietorship and partnership, a company has to comply with more
legal requirements. It consumes considerable time and effort.

3. Management Mischief’s:
Sometimes the managers and directors misuse the company resources for their
personal benefits. This brings losses to the company and company is closed.

4. Lack of Personal Interest:

Unlike proprietorship and partnership, the day-to-day affairs of a company are
looked after by salaried managers. Since they are the employees not the owners,
they do have hardly any personal interest and commitment in the company. This
may result in inefficiency and, in turn, losses.

Corporations also have disadvantages compared to proprietorships and

partnerships when it comes to taxation. Since the corporation and the stockholders
are considered to be two different legal entities, they face the problem of double
taxation, meaning that the owners are taxed twice.

If an owner of a corporation works for the corporation, he is paid a salary, and

possibly bonuses, like any other employee. He pays taxes on this income, as do
regular employees, reporting and paying the tax on his personal tax return. The
corporation also pays taxes on whatever profits are left in the businesses after
paying out all salaries, bonuses, overhead and other expenses.