ECONOMICS IN EVERY DAY LIFE

MODULE 1
BASIC CONCEPTS AND THE METHODS OF ECONOMICS
 Economics

• The word ‘Economics’ has been derived from the Greek

words ‘oikos’ (a house) and ‘nemein’ (to manage). Thus
economics means managing a household with limited
resources.
• Economics is a social science concerned with the production,
distribution, and consumption of goods and services. It
studies how individuals, businesses, governments, and
nations make choices about how to allocate resources.
• Economics can generally be broken down into
macroeconomics, which concentrates on the behavior of the
economy as a whole, and microeconomics, which focuses on
individual people and businesses.
Definitions of Economics
1. Wealth definition
2. Welfare definition
3. Scarcity definition
4. Growth definition
• As we know the Central problems of an economy arises
due to the following reasons.
1 Human wants are unlimited.
2. Resources are limited
3. Resources have alternative uses.
• The resources available to the human are limited,but
their wants are unlimited. Due to the scarcity of
resources,the economy faces the problem of choice. This
mismatch between unlimited wants and limited resources
that gives rise to three Central problems faced by every
economy
Central problems of an economy

Problem of allocation of resources

1. WHAT TO PRODUCE AND IN WHAT QUANTITIES?
• Every society wants thousands of goods and services. Since
resources are scarce, all these goods and services cannot be
produced. So it has to decide what type goods are produced.
2. HOW TO PRODUCE
• It is the problem related with the technique of production. There
are two techniques of production --- Labour intensive and Capital
intensive
• Labour intensive is a production technique, which uses
more amount of labour and less amount of capital.
Capital intensive is a production technique, which uses
more amount of capital and less amount of labour.
3. FOR WHOM TO PRODUCE :
• It is the problem related with distribution. It means
distribution of output among the factors of production.
This is called functional distribution.
Problem of efficiency
• Efficient use of resources refers to the ways using the available resources in
an efficient way to satisfy the wants of the people. It implies that an economy
is producing efficiently that increase in the production of one good will
reduce the production of another good. Therefore the maximum amount of
goods are produced with the available resources in an economy. And the
efficiency in the distribution of goods in a best possible manner to satisfy the
consumer needs. This is known as the problem of how to obtain the
efficiency in the use of resources and distribution of the goods produced in
an economy.
Problem of fuller utilization of resources
• Problem of fuller utilization of resources: Every economy has been endowed
with limited resources and the human needs and wants are unlimited. Hence
the optimum management of the resources to its maximum extent is usually
not possible.Fuller utilization of resources can be referred to the efficient as
well as full utilization of all the resources in the production process of the
goods and services in an economy so that all the human wants are mostly
satisfy.
Problem of growth of resources

• Another important issue to know whether the productive

capacity of an economy is increasing, static or declining.
The increase in productive capacity of an economy over
time is called economic growth. For under-developed
economies, their basic problem is how to accelerate the
pace of their economic growth.
 Economic systems

• Capitalist Economy
• Socialist Economy
• Mixed Economy
Capitalistic Economy
• Its main characteristic is that it most means of production and property are
privately owned by individuals and companies. The government has a
limited role in such an economy limited to management and control
measures.

• So a capitalist economy is a liberal economy. Market operates through the

forces of demand,supply and prices of the products. There is no direct
government intervention .USA, UK, Germany, Japan, Singapore all are
classic examples of capitalist economies.
Socialist Economy
• In a socialist economy, the setup is exactly opposite to that of a capitalist
economy. In such an economy the factors of production are all state-owned.
So all the factories, machinery, plants, capital, etc. is owned by a community
in control of the State.

• All citizens get the benefits from the production of goods and services on the
basis of equal rights. Hence this type of economy is also known as the
Command Economy.

• So basically in a socialist economy, private companies or individuals are not

allowed to freely manufacture the goods and services. And the production
occurs according to the needs of the society and at the command of the
State or the Planning Authorities. The market and the factors of supply and
demand will play no role here.
socialist economy

• The ultimate aim of a socialist economy is to ensure the

maximization of wealth of a whole community, a whole
country. It aims to have an equal distribution of wealth
amongst all its citizens, not just the welfare of its richest
companies and individuals.
• Cuba, China, and North Korea have strong elements of
socialist market economies.
 Mixed Economy
• As the name suggests a mixed economy is the golden combination of a
command economy and a market economy. So it follows both price
mechanism and central economic planning and oversight.

• The idea behind a Mixed Economy is to tackle the demerits of both a

capitalist economy and a socialist economy and come up with a unique
system. It appreciates the concept and the freedom of private ownership of
properties and resources.
• India is a best example for Mixed Economy.
How economies tackle the problems
Capitalist economy
• It is the market economy where the price mechanism is the main driver of
the capitalist system.
• The system also known as Laissez - Faire system where the role of
government is minimum in economic activities.
• Problems are tackled by market forces of demand, supply and price.
• Production will be based on demand
• The choice technique will be decided by the cost
• The question ‘for whom’ is decided by purchasing power of people.
• Economic decisions regarding the production are taken by private
entrepreneurs
• Profit motive is the mainspring of all economic activity.
 Socialist economy
• In a centrally planned economy, the government or the central authority
plans all the important activities in the economy. All important decisions
regarding production, exchange and consumption of goods and services are
made by the government.

• There is no private sector, it is all public sector enterprises.

• Administered price mechanism, existence of central planning, motto of the

welfare of the people are the main characteristics.
 Mixed economy

• Combination of public sector and private sector.

• The popularity of the mixed economy enhanced after the

publication of “ The General Theory of Employment ,
Interest and Money” in 1936 by J M Keynes
Renewable resources and Non renewable resources
Renewable resources
The resources that can be replenished or renewed
naturally over time.
Example : Air, water (hydro energy), solar energy, biogas
Non- Renewable resources
Natural resources that are available in limited quantities.
theses resources can not be renewed in a short duration.
They are also known as exhaustible resources.
For example : coal, natural gas
 Production Possibility Frontier or
Production Possibility Curve
• No country can produce everything that it wants. The
mismatch between wants and resources sets limits to
production.The limits to production is explained by the
Production Possibility Curve. The nature of economic
problem can be explain with the help of Production
Possibility Curve.
 ECONOMICS

• Economics is divided into two categories: microeconomics and

macroeconomics. Microeconomics is the study of individuals and
business decisions, while macroeconomics looks at the decisions
of countries and governments.
• Though these two branches of economics appear different, they
are actually interdependent and complement one another.
 MICRO ECONOMICS
• Microeconomics is a branch of economics that studies the behavior of
individuals and firms in making decisions regarding the allocation of scarce
resources and the interactions among these individuals and firms.
• Microeconomics focuses on supply and demand and other forces that
determine price levels in the economy. It takes a bottom-up approach to
analyzing the economy. In other words, microeconomics tries to understand
human choices, decisions and the allocation of resources.
• The key factors of microeconomics are as follows:
• Demand, supply, and equilibrium
• Production theory
• Costs of production
• Labour economics
• Examples: Individual demand, and price of a product.
• Demand, Supply and Equilibrium: Prices are determined by the law of supply
and demand. In a perfectly competitive market, suppliers offer the same
price demanded by consumers. This creates economic equilibrium.
• Production Theory: This principle is the study of how goods and services are
created or manufactured.
• Costs of Production: According to this theory, the price of goods or services
is determined by the cost of the resources used during production.
• Labor Economics: This principle looks at workers and employers, and tries
to understand patterns of wages, employment and income.
MACRO ECONOMICS
• John Maynard Keynes is often credited as the founder of macroeconomics.
• Studies the behavior of a country and how its policies impact the economy as a whole. It
analyzes entire industries and economies, rather than individuals or specific companies,
which is why it's a top-down approach. It tries to answer questions such as, "What should
the rate of inflation be?" or "What stimulates economic growth?"
• Macroeconomics examines economy-wide phenomena such as gross domestic product
(GDP) and how it is affected by changes in unemployment, national income, rates of growth
and price levels.
• The important concepts covered under macroeconomics are as follows:
• Capitalist nation
• Investment expenditure
• Revenue
• Examples: Aggregate demand, and national income.
MICRO ECONOMICS MACRO ECONOMICS
Microeconomics studies individual economic units Macroeconomics studies a nation’s economy, as well
as its various aggregates.
Microeconomics primarily deals with individual income, Macroeconomics is the study of aggregates such as
output, price of goods, etc. national output, income, as well as general price levels.
Microeconomics focuses on overcoming issues Macroeconomics focuses on upholding issues like
concerning the allocation of resources and price employment and national household income.
discrimination.
Microeconomics accounts for factors like demand and Macroeconomics account for the aggregated demand
supply of a particular commodity. and supply of a nation’s economy.
Microeconomics offers a picture of the goods and Macroeconomics helps ensure optimum utilisation of
services that are required for an efficient economy. It the resources available to a country.
also shows the goods and services that might grow in
demand in future
Microeconomics helps point how equilibrium can be Macroeconomics help determine the equilibrium levels
achieved at a small scale. of employment and income of the nation.
Microeconomics also focuses on issues arising due to Macroeconomics also focuses on issues of the entire
price variation and income levels. economy
MODULE 2
MICROECONOMIC CONCEPTS
 MARKET

• A market is a place where we buy and sell goods and services.

• A buyer demands goods and services from the market and the
sellers supply the goods in the market.
• In economics, demand is “the quantity of goods and services that
will be bought for a given price over a period of time”.
Demand
• Demand means the ability and willingness to buy a specific quantity of a
commodity at the prevailing price in a given period of time. Therefore,
demand for a commodity implies the desire to acquire it, willingness and the
ability to pay for it.

• Hence desire alone is not enough. There must have necessary purchasing
power, ie, .cash to purchase it.

• For example, everyone desires to posses Benz car but only few have the
ability to buy it. So everybody cannot be said to have a demand for the car.
Thus the demand has three essentials-Desire, Purchasing power and
Willingness to purchase.
Demand Analysis
• Demand analysis means an attempt to determine the factors affecting the
demand of a commodity or service and to measure such factors and their
influences. The demand analysis includes the study of law of demand,
demand schedule, demand curve and demand forecasting. Main objectives
of demand analysis are;
1) To determine the factors affecting the demand.
2) To measure the elasticity of demand.
3) To forecast the demand.
4) To increase the demand.
5) To allocate the recourses efficiently
 Law of demand
• Law of demand shows the relation between price and quantity demanded of a
commodity in the market. In the words of Marshall “the amount demanded
increases with a fall in price and diminishes with a rise in price”.

• Law of Demand states that people will buy more at lower price and buy less at
higher prices”. In other words while other things remaining the same an increase in
the price of a commodity will decreases the quantity demanded of that commodity
and decrease in the price will increase the demand of that commodity. So the
relationship described by the law of demand is an inverse or negative relationship
because the variables (price and demand) move in opposite direction.
Demand Function
Demand function shows the functionalrelationship between
Quantity demanded for a commodity and its various
Determinants.
 Qxd=f(Px, I, Pr, T, A,E)
1) Demand of Commodity Q xd
2) Function of commodity x (f)
3) Price of good or service (Px)
4) Incomes of consumers (I)
5) Prices of related goods & services (Pr)
6)Taste patterns of consumers (T)
7)Advertisement expenditure (A)
8)Future Expectation of product (E)
 Qxd = f (Px)
The quantity demanded of the commodity ‘X’ is a function of its own
price, other determinants are constant. (ceteris paribus)

ceteris paribus
❖ ceteris paribus latin phrase
❖ meaning - other things remaining constant or all other things
being the same.
 Demand schedule
• Demand schedule is a statistical/tabular statement showing the
different quantities of a commodity which will be bought at its
different prices during a specified time period. It is a table which
represents functional relationship between price of a commodity and
its quantity demanded. Demand schedule can be for an individual
–known as Individual Demand Schedule (IDS) and it can be for the
whole market-known as Market Demand Schedule (MDS). MDS can be
obtained by aggregating the IDS.
 Individual demand Schedule
• An individual demand schedule is a list of
quantities of a commodity purchased by an
individual consumer at different prices. The
following table shows the demand schedule of an
individual consumer for apple. When the price falls
from Rs 10 to 8, the quantity demanded increases
from one to two. In the same way as price falls,
quantity demanded increases. On the basis of the
above demand schedule we can draw the demand
curve.
 Demand Curve
• A curve indicating the total quantity of a
product that all consumers are willing and
able to purchase at the prevailing price level,
holding the prices of related goods, income
and other variables as constant.
• A demand curve is a graphical
representation of a demand schedule. The
price is quoted in the ‘Y’ axis and the
quantity demanded over time at different
price levels is quoted in ‘X’ axis. Each point
on the curve refers to a specific quantity that
will be demanded at a given price.
• Showing that as price falls, quantity demanded rises. This inverse relationship
between price and quantity is called as the law of demand. .
• Due to this inverse relationship, demand curve is slopes downward from left to
right. This kind of slope is also called “negative slope”.
 Market demand schedule
• Market demand refers to the total
demand for a commodity by all the
consumers. It is the aggregate
quantity demanded for a commodity
by all the consumers in a market. It
can be expressed in the following
schedule.
 SUPPLY
• The term supply refers to the quantity of a good or service that producers
are willing and able to sell during a certain period under a given set of
conditions.

• Supply of a commodity refers to the various quantities of the commodity

which a seller is willing and able to sell at different prices in a given market
at a point of time, other things remaining the same. Supply is what the seller
is able and willing to offer for sale.
• Law of Supply: is the relationship between price of the commodity and quantity of
that commodity supplied. i.e. an increase in price will lead to an increase in quantity
supplied and vice versa. Therefore we can say that there is a positive relationship
between the quantity that suppliers are willing to sell and the price level. Thus,
according to the law of supply, the quantity supplied of a commodity is positively
related to price. Because of this direct or positive relationship between price and
quantity supplied of a commodity the supply curve slopes upward to the right.

• Supply Schedule:
• It is a table showing how much of a commodity, firms can sell at different prices.
 Supply function
Qxs = f(Px, P r, Pi, T, E, N)
1) Supply of Commodity Qxs
2) Function of commodity x (f)
3) Price of good or service (Px)
4) price of inputs (Pi)
5) Prices of related goods & services (Pr)
6)Technology (T)
7) Number of producers in the market (N)
8)Future Expectation of product (E)
• The law supply is based on the assumption that factors, other than price of the commodity, that
affect the supply remain the same. The functional relationship between the quantity supplied
and the price of a commodity can be expressed as:
• Qs = f (P x)
Where Qs = quantity supplied and P = price of commodity
Supply Schedule
• It is a statement in the form of a table that shows the different quantities of a
commodity that a firm or a producer offers for sale in the market at different
prices.
• It denotes the relationship between the supply and the price, while all non-
price variables remain constant.
• There are two types of Supply Schedules:
• 1. Individual Supply Schedule
• 2. Market Supply Schedule
 Elasticity of demand

• Elasticity of demand can be defined as “the degree of

responsiveness in quantity demanded to a change in
price”. Thus it represents the rate of change in quantity
demanded due to a change in price. There are mainly
three types of elasticity of demand:
• 1. Price Elasticity of Demand.
• 2. Income Elasticity of Demand. and
• 3. Cross Elasticity of Demand.
Price Elasticity of demand

• Price Elasticity of demand measures the change in quantity

demanded to a change in price. It is the ratio of percentage
change in quantity demanded to a percentage change in
price. This can be measured by the following formula.
Degree of elasticity of demand Such as
• perfectly elastic demand, perfectly inelastic demand,
relatively elastic demand, relatively inelastic demand and
unitary elastic demand.
 Determinants of price elasticity of demand
1. Nature of the commodity
• The Elasticity of Demand for a good is affected by its nature. Different goods can
be a necessity good, a comfort good, or a luxury good for a person.
• There is one more thing that is a single good can be a necessity for one person, a
comfort for the second person, and a luxury for a third person. So, we can say
that a good’s nature is relative.
i. A necessity good like vegetables, food grains, medicines and drugs, has an
inelastic demand. Such goods are required for human survival so their demand
does not fluctuate much against a change in their price.
ii. A comfort good like a fan, refrigerator, washing machine, etc., has an elastic
demand as their consumption can be postponed for a time period.
iii. A luxury good like AC, Cars, Diamond has a relatively high elasticity of demand
when compared to comfort goods.
 2. Availability of substitutes
• The Price Elasticity of Demand for a good, with a large number of substitutes
available, is very high.

• The possible reason behind this is that even a small rise in the price of such
goods will induce its buyer to look for its substitutes. An example of this can be
an FMCG product like a packet of chips. A rise of ₹2 on a packet of Lays will
induce the buyer to go for Haldiram’s chips.

• Thus, the availability of a large number of close substitutes increases the

sensitivity against change in price, or we can also say that this increases the
Price Elasticity of Demand.
 3. Income levels
• Our society is divided into different classes based on incomes and lifestyle. Upper-
class people generally have a higher income and live a lavish life whereas the
lower class people can’t afford luxury items because they have a low income.

• Income levels have a considerable effect on the elasticity of demand. The

Elasticity of Demand for a commodity is generally very low for higher income level
groups. The change in prices does not bother people from such groups.

• Whereas the Price Elasticity of Demand of a commodity is very high for people
belonging to low-income level groups. Poor people are highly affected by the
change in the prices of commodities.
 4. Time period
• The price elasticity of demand varies directly with the time period. The given
time period can be as shorts as a day and as long as several years.

• The price elasticity of demand is directly proportional to the time period. This
means the elasticity for a shorter time period is always low or it can be even
inelastic.
• The reason stated for this is the redundant human nature to change habits.
We generally stick to a commodity and respond very late to the price changes.
However, the elasticity of demand is high in a longer time period as our habit
changes over time. We can substitute the original product if its price changes
in the long run.
 5. Number of uses

• Greater the number of uses of a commodity has, the

more price elastic the demand for that commodity is likely
to be.
Elasticity of supply
• Es = elasticity of supply
• Δq = change in quantity supplied
• Δp = change in price
• p = price of commodity
• q = quantity supplied of the commodity
Types of elasticity
 Determinants of elasticity of supply

• Time
• Change in cost of production
• Storage cost
• Responsiveness of producers
• Production Substitutes and complements
 Market structure
• The level of production of any commodity depends upon structure of its
market. Possible outcomes of sales, revenues, profits are prices and
structured under market structures. The firms demand curve to the industry
demand curve is expected to depend on such things as the number of
sellers in the market and the similarity of their products. These are aspects
of market structures which may be called characteristics of market or
generalization that are likely to influence firm's behaviour and performance.
These include the ease of entering the industry, the nature and size of the
purchasers of the firm's products, and the firm’s ability to influence demand
by advertising.
• The price and level of production of a commodity depends upon the market
structure of its conditions. Market demand depends on the following factors:
(i) Nature of the commodity: It is to be taken into account whether the goods
are homogeneous or heterogeneous.
(ii) Number of buyers and sellers of the product in the market.
(iii) Mutual inter-dependence of buyers and sellers.
• In brief the market structure depends on the level or forms of competition
which are as under:
1. Perfect Competition Market
2. Monopoly Market
3. Monopolistic Competition
4. Oligopoly Market
 Monopolistic Competition
• The perfect competition and monopoly are the two extreme forms.
• To bridge the gap the concept of monopolistic competition was developed
by Edward Chamberlin.

• It has both the elements like many small sellers and many small buyers.
• There is product differentiation. Therefore close substitutes are available and at the
same time it is easy to enter and easy to exit from the market. Therefore it is
possible to incur loss in this market.

• The profit maximization for each firm, for each product depends upon the

differentiation and advertising expenditure.

 Oligopoly Market
• This is a market consisting of a few firms relatively large firms, each with a
substantial share of the market and all recognizing their interdependence. It is a
common form of market structure. The products may be identical or differentiated.
The price determination and profit maximization is based on how the competitors
will respond to price or output changes.

• Characteristics of Oligoploy market

Few sellers, Lack of uniformity in the product, Advertisement cost is included

No monopoly competition, There is interdependency, Experience of Group behavior,
Price rigidity, Price leadership, Barriers to entry
 Other forms/ classification of market

• Duopoly: Only two sellers

• Duopsony: Only two buyers
• Oligopsony: Market system with a few buyers
• Monopsony: Market system with only one buyer
• Bilateral Monoploy: The market system with one buyer
and one seller
 Multinational Corporations

• A multinational corporation (MNC) is a company that

operates in its home country, as well as in other countries
around the world. It maintains a central office located in
one country, which coordinates the management of all its
other offices, such as administrative branches or
factories.
• It is also known by various names such as global
enterprise, international enterprise, world enterprise,
transnational corporation
 Features of MNC
1. Very high assets and turnover
To become a multinational corporation, the business must be large and must own a
huge amount of assets, both physical and financial. The company’s targets are high,

and they are able to generate substantial profits.

2. Network of branches
• Multinational companies maintain production and marketing operations in
different countries. In each country, the business may oversee multiple offices
that function through several branches and subsidiaries.
3. Control
In relation to the previous point, the management of offices in other countries is
controlled by one head office located in the home country. Therefore, the source of
command is found in the home country.

4. Continued growth
• Multinational corporations keep growing. Even as they operate in other countries,
they strive to grow their economic size by constantly upgrading and by conducting
mergers and acquisitions.
5. Sophisticated technology
When a company goes global, they need to make sure that their investment will
grow substantially. In order to achieve substantial growth, they need to make use of
capital-intensive technology, especially in their production and marketing activities.

6. Professional management
Multinational companies aim to employ only the best managers, those who are
capable of handling large amounts of funds, using advanced technology, managing
workers, and running a huge business entity.

•
7. Forceful marketing and advertising
One of the most effective survival strategies of multinational corporations is
spending a great deal of money on marketing and advertising. This is how they
are able to sell every product or brand they make.

8. Good quality products

Because they use capital-intensive technology, they are able to produce top-of-
the-line products.
 ADVANTAGES OF MNC
• Assure Quality Standards
• Modern Technology
• Research and Development
• Growth of Industry
• Expand Exports
• Best Utilization of Resources
• Expand Local Industries
• Management job Opportunities
• Development of Country
• Taxes and Other Expenses
• Increase Employment
• Remove Monopolies
• Improvement in Standard of Living
 DISADVANTAGES OF MNC

• Environmental Damage
• Increases competition
• Pressurize Governments
• Uncertainty in jobs
• Reduces Tax Liability
• Low-skilled employment
• Exploiting Workers
• Export Profits
• Impact On Societies
• Inappropriate technology
 Cartels
• Cartel is an agreement between competing firms to control prices or exclude the
entry of a new competitor in a market.

• A cartel is an organization of a few independent producers for the purpose of

improving the profitability of the firms involved. This usually involves some
restriction of output, control of price, and allocation of market shares.

• Some examples of a cartel include:

• The Organization of the Petroleum Exporting Countries (OPEC), an oil cartel
whose members control 44% of global oil production and 81.5% of the world’s oil
reserves.
 OPEC : A few facts
• The Organization of the Petroleum Exporting Countries (OPEC) was founded in
Baghdad Conference with the signing of an agreement in September 1960 by
five countries namely Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

• These countries were later joined by Qatar (1961), Indonesia (1962), Libya
(1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador
(1973), Gabon (1975), Angola (2007)

• OPEC’s objective is to coordinate and unify the petroleum policies of its

Member Countries and ensure the stabilization of oil markets in order to secure
an efficient, economic and regular supply of petroleum to consumers, a steady
income to producers and a fair return on capital for those investing in the
petroleum industry.
 Merger
• A merger is the combination of two firms, which subsequently form a new legal entity under the
banner of one corporate name.
• After the merger, companies will secure more resources and the scale of operations will increase.
• Companies may undergo a merger to benefit their shareholders. The existing shareholders of the
original organizations receive shares in the new company after the merger.
• Companies may agree for a merger to enter new markets or diversify their offering of products and
services, consequently increasing profits.
• Mergers also take place when companies want to acquire assets that would take time to develop
internally.
• A merger between companies will eliminate competition among them, thus reducing the advertising
price of the products. In addition, the reduction in prices will benefit customers and eventually
increase sales.
• Mergers may result in better planning and utilization of financial resources.
• For example M Ltd. and N Ltd. joined together to form a new company P Ltd.
 Acquisitions
• An acquisition is when one company purchases most or all of another company's
shares to gain control of that company. Purchasing more than 50% of a target
firm's stock and other assets allows the acquirer to make decisions about the
newly acquired assets without the approval of the company’s other shareholders

• They may seek economies of scale, diversification, greater market share,

increased synergy, cost reductions, or new niche offerings.

EXAMPLES OF MERGER AND ACQUISITION

• Acquisition of Myntra by Flipkart in the year 2014.

• The merger of Fortis Healthcare India and Fortis Healthcare International.

 Difference between merger and acquisitions
• A type of corporate strategy in which two companies amalgamate to
form a new company is known as Merger. A corporate strategy, in
which one company purchases another company and gain control over
it, is known as Acquisition.
• In the merger, the two companies dissolve to form a new enterprise
whereas, in the acquisition, the two companies do not lose their
existence.
• Two companies of the same nature and size go for the merger. Unlike
acquisition, in which the larger company overpowers the smaller
company.
• The merger is done voluntarily by the companies while the acquisition
is done either voluntarily or involuntarily.
• In a merger, there are more legal formalities as compared to the
acquisition.
 DEMERGER

• A demerger is a form of corporate restructuring in which

the entity's business operations are segregated into one
or more components. It is the converse of a merger or
acquisition.
Types of demerger
• spin off
• split off
 Spinoff
• When a line or division of a business of the conglomerate company divides
into being a separate entity then this type of demerger example is known as
a spinoff.
• Demerger example: Let’s say company W has two lines of business mainly
insurance and consultancy. However, if the company decides to separate its
consultancy service business into a separate entity then it is termed a spinoff.
Moreover, this must be noticed that both have separate legal entities, a new
company would come into existence and the parent company does not
dissolve.
• Demerger example: WIPRO IT division in the 1980s
Split up

• In case of a split-up, a conglomerate company splits up

into two separate companies each holding maybe one
different line of business.

• Demerger example: For split-up as a demerger example,

company W separates into two new companies X and V
with insurance and consultancy as a business. Moreover,
this should be noticed that after company W would not
exist.