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Equity (finance):
In finance, equity is the ownership in any asset after all debts associated with
that asset are paid off. It is total assets minus total liabilities; here also called
shareholder's equity or net worth or book value.
Capital:
Purchase
Maintenance
depreciation
Capital investment
Labour Intensive Projects versus Capital Intensive Projects:
• A labour intensive business is one in which the main cost is that of labour, and
it is high compared to sales or value added.
• The costs of labour are: wages and other benefits, recruitment, training and
so on.
training
recruitment
• Some flexibility in capacity may be available by use of overtime and
temporary staff, or by laying-off workers.
• Labour intensive processes are more likely to be seen in Job production and
in smaller-scale enterprises.
Flexibility
Temporary Laying-off
overtime
staff workers
• In under developed countries, due to chronic unemployment or cheap
labour, labour-intensive methods are preferred to capital-intensive.
• The most efficient use of resources in less developed countries will tend to
favour labour intensive methods.
• For innovations, it would also follow the Capital Saving and Labour – using
innovations, it would be preferred. However, It may be profitable to adopt
capital-intensive techniques to increase productivity.
• For example, In India, Labour force is available in plenty. This is the reason
most of the building industry is Labour Intensive including both skilled and
unskilled labour.
The factors of production are the inputs used to produce goods and services.
Labour, land, capital and material are the four most important factors of
production.
Factors of production
Labour
Material
Land
Capital
Labour Market:
• Labor markets, like other markets in the economy, are governed by the forces
of supply and demand.
• Labor markets are different from most other markets because labour demand
is a derived demand.
• Most labor services, rather than being final goods ready to be enjoyed by
consumers, are inputs into the production of other goods.
The Production Function and the Marginal Product of Labour:
• The marginal product of labour is the increase in the amount of output from
an additional unit of labor.
Input of labour
Input of labour
Production Production
Marginal Production
Production Production
The Value of the Marginal Product and the Demand for Labor:
• Because the market price is constant for a competitive firm, the value of the
marginal product diminishes as the number of workers rises.
• To maximize profit, the firm hires workers up to the point where the value of
the marginal product exceeds the wage, so hiring another labour would
increase profit. Above this number of labourers, the value of the marginal
product is less than the wage, so the marginal worker is unprofitable
• The value of the marginal product increases when the output price for that
product is increased.
• Thus, when the output price changes, the value of the marginal product
changes, and the labour demand curve shifts.
• An increase in the output prices raises the value of the marginal product of
each worker, and, therefore, increases labour demand from the firms
producing similar product. Conversely, a decrease in the output prices
reduces the value of the marginal product and decreases labor demand.
Output
price
Value of
marginal
product
Labour demnd
It raises the marginal product of labour, which in turn increases the demand for
labour.
Quantity available of one factor of production can affect the marginal product of
other factors.
The Tradeoff between Work and Leisure:
• The tradeoff between labour and leisure lies behind the labor supply curve.
• The opportunity cost of an hour of leisure for a labour is his wage for that one
hour.
• The labour supply curve reflects how workers’ decisions about the labour–
leisure tradeoff respond to a change in that opportunity cost.
• Since time is limited, if more hours of work is offered, it means labour are
enjoying less leisure
Labour supply curve Shifting of Labour supply curve
Factors that Causes the Labor Supply Curve to Shift:
The labor supply curve shifts whenever people change the amount of labour they
want to work at a given wage.
• While the firms are deciding how much labour to hire, they are also deciding
about other inputs of production, i.e. land, capital and material.
• The term ‘capital’ refers to the stock of equipment and structures used to
produce new goods and services.
• The ‘purchase price of land or capital’ is the price a person pays to own that
factor of production indefinitely.
• The ‘rental price’ is the price a person pays to use that factor for a limited
period of time. The ‘wage’ is the rental price of labour.
• The rental price of land, and the rental price of capital are determined by
supply and demand.
• For both land and capital, the firm increases the quantity hired until the value
of the factor’s marginal product equals the factor’s price.
• As long as the firms are using the factors of production that are competitive
and profit-maximizing, each factor’s rental price must equal the value of the
marginal product for that factor.
When the supply of any factor of production changes, the resulting effects are not
limited to the market for that factor. In most situations, factors of production are
used together in a way that makes the productivity of each factor dependent on
the quantities of the other factors available to be used in the production process.
As a result, a change in the supply of any one factor alters the earnings of all the
factors.
Labour
Capital
Financing of Projects:
• Project financing sets up the project so the risks and gains related to the
project would be justifiably divided among all project
parties, namely, sponsors, shareholders, subscribers, suppliers or operators
bearing a particular part of risk.
Sources of Capital:
Business firms can meet their demand for capital from various sources, such as:
• Share capital,
• Term loans,
• Debenture capital,
• Incentive sources,
• Deferred credit,
• Miscellaneous sources
Share capital
Term loans are provided in Indian Rupee as well as Foreign Currency, depending
upon the need.
Debenture capital
Akin (similar) to promissory notes, debentures are instruments for raising debt
capital.
A firm’s cost of capital is the rate of return it must earn on its investments for the
market value of the firm to remain unaffected. It can also be regarded as the rate
of return required by the investors on capital provided by them.
• Capital is a scarce and productive commodity. Since every scarce and useful
commodity has a price, capital too has a price, known as ‘Cost of Capital’.
• The cost of capital can be ‘explicit’, i.e. interest paid on it, or ‘implicit’, i.e.
opportunity cost of that capital.
• The cost of capital plays an important role in the financing of projects. Since
capital is available at a cost, it demands the best possible use of available
funds, to assure acceptable return on the invested capital.
Different concepts of cost are presented below to estimate the cost of
capital:
Cost of Debt-Capital: it refers to the funds directly borrowed from the market
through public deposits, bonds and debentures. The cost of debt capital may be
defined as the rate of return that must be earned on the borrowed capital to keep
the earning of common stockholders unchanged.
Cost of Equity Capital (Common Stock): it may be defined as the minimum rate of
return on the projects financed through the sale of common stocks that can keep
the market value of issues unchanged. The opportunity cost of stocks issued
earlier must be equal to the rate of return on them.
Agencies and Institutions directly and indirectly influencing economic
aspects of projects:
Unit Trust of India: it was set up with the principle objective of mobilizing public
savings and channeling them into productive corporate investments. It has
emerged into one of the two largest institutional investors in India.
State Financial Corporations (SFCs): they render assistance to medium and small
scale industries in their respective states. Respective state governments are one of
the shareholders in these financial institutions.