PRICE DETERMINATION UNDER PERFECT COMPETITION

 Though perfect competition is rare,almost a non-existant situation, yet we study price determination under the situation. A perfectly competitive market is one in which the number of buyers and sellers is very large, All engaged in buying and selling a homogeneous product without any artificial restriction and possessing perfect knowledge of a market at a time.

There are two parties which bargain in such a market, the buyers and the sellers. It is only when they agree,  a commodity can be bought and sold at a certain price. Thus product pricing is influenced both by buyers and sellers, that is by demand and supply.

The demand and supply are the two forces, which move in the opposite directions. Price is determined at a point where these two forces are equal, that is known as equilibrium price.
The firm may earn normal profits, super normal profits in the short run whereas it earns normal profits in the long run. In a perfectly competitive market, market demand and market supply determine the equilibrium price.

Price of a commodity is determined by the demand and supply. Both the demand and the supply vary with price.

MARKET PRICE VS NORMAL PRICE :

The price prevailing in the long run is called normal price.The price determined in the very short period is called Market Price.As supply remains constant, in this period, demand plays an important role in the determination of price.In the long run supply can be adjusted fully to changes in demand. In this period supply plays an important role.

PRICE DETERMINATION IN SHORT PERIOD:

First of all we divide product into perishable and durable according to the nature of product. After this, we create demand and supply curves on the graph paper. In short period, price will be affected from demand because we can not increase our supply according to demand.

PRICE DETERMINATION IN LONG PERIOD :

In long period, only normal price will be fixed at the point where total quantity of demand will be equal to the total quantity of supply. Company or firm will receive only normal profit at this equilibrium.

SEBI (Securities Exchange Board of India)

In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both development & regulation of the market, and independent powers have been set up. Paradoxically this is a positive outcome of the Securities Scam of 1990-91.

The basic objectives of the Board are as follows :

    To protect the interests of investors in securities;

    To promote the development of Securities Market;

    To regulate the securities market and

    For matters connected therewith or incidental there to.

Since its inception SEBI has been working targetting the securities and is attending to the fulfillment of its objectives with commendable zeal and dexterity. The improvements in the securities markets like capitalization requirements, margining, establishment of clearing corporations etc. reduced the risk of credit and also reduced the market.

SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the eligibility criteria, the code of obligations and the code of conduct for different intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers, credit rating agencies, underwriters and others. It has framed bye-laws, risk identification and risk management systems for Clearing houses of stock exchanges, surveillance system etc. which has made dealing in securities both safe and transparent to the end investor.

Another significant event is the approval of trading in stock indices (like S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient and effective product because of the following reasons:

    It acts as a barometer for market behavior;

    It is used to benchmark portfolio performance;

    It is used in derivative instruments like index futures and index options;

    It can be used for passive fund management as in case of Index Funds.

Functions of SEBI Explain in detail?

The Following are some of the main functions of SEBI:

1. The business that happens in the Indian stock exchanges and other securities markets in India

2. Registering and monitoring of Intermediaries like Brokers who may participate in the securities market

3. Registering and monitoring the work of depository participants, custodians of securities, FII's etc

4. Prohibiting unfair trade practices and fraudulent practices in the markets

5. Promoting Investor education

6. Training of Intermediaries

7. Prohibiting Insider trading

8. Regulating substantial acquisitions and take overs of companies.

Powers of SEBI - Securities and Exchange Board of India

 1. Powers relating to stock exchanges & intermediaries

SEBI has wide powers regarding the stock exchanges and intermediaries dealing in securities. It can ask information from the stock exchanges and intermediaries regarding their business transactions for inspection or scrutiny and other purpose.

2. Power to impose monetary penalties

SEBI has been empowered to impose monetary penalties on capital market intermediaries and other participants for a range of violations. It can even impose suspension of their registration for a short period.

3. Power to initiate actions in functions assigned

SEBI has a power to initiate actions in regard to functions assigned. For example, it can issue guidelines to different intermediaries or can introduce specific rules for the protection of interests of investors.

4. Power to regulate insider trading

SEBI has power to regulate insider trading or can regulate the functions of merchant bankers.

5. Powers under Securities Contracts Act

For effective regulation of stock exchange, the Ministry of Finance issued a Notification on 13 September, 1994 delegating several of its powers under the Securities Contracts (Regulations) Act to SEBI.

SEBI is also empowered by the Finance Ministry to nominate three members on the Governing Body of every stock exchange.

6. Power to regulate business of stock exchanges

SEBI is also empowered to regulate the business of stock exchanges, intermediaries associated with the securities market as well as mutual funds, fraudulent and unfair trade practices relating to securities and regulation of acquisition of shares and takeovers of companies.

Law of Diminishing Marginal Utility

Introduction :

It was introduced by Gossen later it was developed by Jevons and marshall. It is also known as Gossens 1st Law.

Definition of law of diminishing marginal utility :

"As a consumer increase the consumption of any one of the commodity, keeping constant consumption of all other commodity, the marginal utility of variable commodity must eventually decline."

Meaning :

As a consumer consume more and more unit of commodity its marginal utility decline

Assumptions : Law of DMU :

1. Uniform commodity

2. The taste of consumer remain unchanged during the consumption process

3. The unit of commodity are homogeneous, they are a like in size and quality.

4. There is no time gap between the consumption of the two unit of the commodity

5. The prize of different units and of the substitutes of commodity remain same.

6. The unit of commodity should be suitable size, For example Giving water to a thirsty person by means of spoon will increase the utility of subsequent spoon of water.

7. The taste, preference and income of consumer remain unchanged.

8. This law will apply to only pleasure economy.

9. The mental situation of consumer remain same.

Importance :

1. The law of diminishing marginal utility is basic of consumption law, the law of demand, law equi - marginal and concept of consumer surplus based on this law.

2. The change in design, pattern and packaging of the commodity very often brought about by producer are keeping in with this law.

3. The progression in principal of taxation is also based on this law

    Ex : As a persons income increases the rate of taxes raises because the marginal utilty of money to him falls, with increase to his income.

4. The Law helps to explain the phenomenon in value theory, The prize increases of the commodity when it supply falls.

5. Lastly the law underlies socialist plea of an equitable distribution of wealth.

Limitations :

1. homogeneous product

2. There is continuous consumption without time interval.

3. The commodity should be divisible.

4. Suitable unit of commodity.

5. Rational behaviour of the consumer

6. This law can not be apply for precious goods.

7. Marginal utility of money is constant

8. There is no change in preference.

9. There is no change in income.

10. There is no change in prize.

FINANCIAL MANAGEMENT

MEANING OF FINANCIAL MANAGEMENT

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.

SCOPE/ELEMENTS

1.       Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets is also a part of investment decisions called as working capital decisions.

2.       Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby.

3.       Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two:

a.     Dividend for shareholders- Dividend and the rate of it has to be decided.

b.     Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise. 

OBJECTIVES OF FINANCIAL MANAGEMENT

The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be-

1.     To ensure regular and adequate supply of funds to the concern.

2.     To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders.

3.     To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.

4.     To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved.

5.     To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital. 

FUNCTIONS OF FINANCIAL MANAGEMENT

1.     Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programs and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise.

2.     Determination of capital composition: Once the estimation has been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.

3.     Choice of sources of funds: For additional funds to be procured, a company has many choices like-

a.     Issue of shares and debentures

b.     Loans to be taken from banks and financial institutions

c.      Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source and period of financing.

4.     Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible.

5.     Disposal of surplus: The net profits decisions have to be made by the finance manager. This can be done in two ways:

a.     Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.

b.     Retained profits - The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company.

6.     Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials, etc.

7.     Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.