Different aspects of Management, Concept of Management

We often come across the word management referring to people who run enterprises organized as either sole-trading or partnership firms. These organizations are either owner-manager or managed by professional managers. But in the current situation require professionally trained people to manage the business. The extent of success these managers achieve depends on their knowledge of management theory and its skillful application. In the transition from owner-managed enterprises to professional-managed enterprises, profit is no longer the sole indicator of success. The management is obliged to put up performance in areas which are concerns of groups other than owners.
Concept of Management
Management is essential at all levels of an organization. But the word management has been given different interpretations. It is used as a noun, a process, and a separate discipline.

Management as a noun

In general and popular usage, management refers to a distinct group of people who direct the activities of other people and material resources toward the attainment of predetermined goals. Giving a Broader meaning to it, one can look at management as a resource, a system of authority, and a class of elite.

1. Management as an economic resource: The economist's view of management is that it is a factor of production just like entrepreneurship, capital and labor. The managerial resource, to a large extent, determines organizational effectiveness and efficiency. Hence in a dynamic environment, managerial development is more important and its use must be more intensive.

2. Management as a system of authority: Management is a system of authority in the sense that it consists of a team of managers who are responsible for making decisions and supervising the work of others. Managers at different levels possess a varying degree of authority. Higher level managers manage managers at middle levels. Middle and lower level managers supervise and control their subordinate managers and workers.

3. Management as a class of elite: Sociologists view management as a class and status system. Increasing complexity of management in the modern complex organization has led to managers being regarded as a distinct class in society, who possess knowledge and skill of higher order. Access to managerial positions is based on achievement criteria, rather than on ascriptive criteria (ie. on family and social origins). This development is viewed by some as a managerial revolution in which the managerial class threatens to become autonomous groups with increasing amount of power. Others view this development not with alarm because the increase in power of managers attracts more of them, which prevents managerial autocracy.

Management as a process

Interpreted as a process, Management consists of a series of inter-related managerial activities classified into various functions with a systematic approach, so as to integrate physical and human resource into an effective operating unit. Management is thus, regarded as the process by which a co-operative group directs action towards common goals.

Management as a discipline

Another connotation of management is that it is a separate discipline having a systematized body of knowledge which managers use in performing their jobs. As a separate field of study, management includes the principles and practice of general management as well as of the various functions of management. It has developed its own techniques and approaches. The theoretical foundations of management have evolved on the basis of experience, observation and scientific investigations.
Related topics:

Definition of Management: Click Here
Management and Administration Click Here
Management as a profession
Classification of managerial skills
Nature of Management
Social Responsibilities of Management
To read management stories please click here

Classification of Managerial Skills

Classification of Managerial Skills

At all levels, Managers require three types of skills. They are:

1. Technical Skills
   
   
2. Human Skill
   
   
3. Conceptual Skills
   
   

1. Technical Skill: It is the ability of a manager to use the types of equipment, methods, and techniques involved in performing specific tasks. Technical skill is required more at the lower level of management I.e. at the supervisory level. At higher levels, the technical skill is less important as managers can rely upon others for technical information.
   
   
2. Human Skill: The ability of a manager to work with, understand, and motivate people in the organization is known as human skill. It also involves the ability to build effective work teams. The human aspect of management requires an individual as well as group relations to be maintained and developed for achieving maximum efficiency. Human skills are important at all levels of management.
   
   
3. Conceptual Skill: This consists of the manager's ability to coordinate all organizational activities and varied interests involved in it. It involves viewing the organization in its totality and understanding the interdependence of its individual parts. Of all the skills, this conceptual skill is the most difficult skill to acquire. Conceptual skill is very important for top management in formulating long-range plans, broad policies and relating the business enterprise to the industry and economy.
   
   

Related topics:
Definition of Management: Click Here
Management and Administration Click Here
Management as a profession
Management: Click Here
Nature of Management
Social Responsibilities of Management
To read management stories please click here

Management as a Profession

Management as a profession

Mr. Louis Allen defined the profession as "a specialized kind of work practiced through and by use of classified knowledge, a common vocabulary, and requiring standards of practice and code of ethics established by a recognized body." Whether management can be called a profession or not will be clear if we compare its features with the characteristics of the recognized profession like medicine, law, accountancy, etc., which are discussed below:

1. Systematic Knowledge: Every profession has a well-defined area of organized knowledge. Management also deals with a distinct area of knowledge which is developed around functions of management. Techniques of management developed by drawing knowledge from other branches like economics, mathematics and so on, facilitate managers to perform their job better. Coordinated decision making in an organization is made possible by application of the same theory by all managers in their decision making. Managers should possess an experimental attitude in the acquisition of new knowledge so as to prove successful in an ever-changing organizational environment.

2. Formalized method of acquiring knowledge: For present-day managers, formal education and training is an important source of knowledge. Transfer of knowledge gained through experience from one living mind to another or intuitive knowledge is no longer considered adequate for practicing managers.

3. Performance-based status: Manager's status in the present day organization is linked to its performance rather than other extraneous factors like family or political connections. This way management is the exacting philosophy with a performance orientation.

4. Code of ethics: Professionals must be governed by a strict code of ethics formulated and enforced by professional bodies to protect their member's integrity. Since it is difficult to identify clearly the membership of management associations and their role, managerial codes of ethics has not yet evolved so as to acceptable to all practicing managers.

5. Dedication and commitment: True professionals through dedication and commitment serve their clients interest. Financial reward is not the measure of their success. Managers today are expected to serve the long-run interest of the organization but they are also conscious of their social responsibilities. Besides, they are entrusted with wealth-producing resources of society which they are expected to put to the most effective use.

We may conclude from the above that management cannot be regarded as a profession in all respects but it has some of the characteristics of a profession.

Related topics:
Management: Click Here
Management and Administration Click Here
Definition of Management
Classification of managerial skills
Nature of Management
Social Responsibilities of Management
To read management stories please click here

Definition of Management

Definition of Management

Management is the art of getting things done through people. In a broader sense, it is the process of planning, organizing, leading and controlling the efforts of organization members and of using all other organizational resources to achieve stated organizational goals. The definition of management can be broadly classified into four groups:

1. Process School: The process School defines management in terms of functions undertaken by the manager in an integrated way to achieve organizational purposes. According to Henri Foyol, to manage is to forecast and plan, to organize, to command, to coordinate and to control. All other definitions of management related to this school are either marginal additions, deletions, or elaborations of the functions listed out in the above definition.

2. Human Relations School: This school emphasizes the human aspect of the organization and conceives it as a social system. It is a social system because managerial actions are principally concerned with relations between people. In fact, management is concerned with the development of people and not the direction of things. The essence of this school is well reflected in the definition of Lawrence Appley to whom management is the accomplishment of results through the efforts of other people.

3. Decision School: The Decision School defines management as rule-making and rule-enforcing body. In fact, the life of a manager is a perpetual choice making activity and whatever a manager does, he does through his decisions. Moreover, decision making power provides a dynamic force for managers to transform the resource of business organization into a productive and cooperative concern.

4. System and Contingency School: According to this school, organizations like any living organism must adapt themselves to their environments for survival and growth. Thus, management involves designing organizations adaptable to changing markets, technology, and other critical environmental factors. The systems theory of organisations are organic and open systems consisting of interacting and interdependent parts and having a variety of goals. Managers are supposed to maintain balance among the conflicting objectives, goals and activities of members of the organisation. He must achieve results efficiently and effectively. According Contingency School there is no best way to design organisations and manage them. Managers should design organisations, define goals and formulate policies and strategies in accordance with the prevailing environmental conditions.

Different schools of thought defined management differently due to three reasons:
1. The difference in perspectives of management and organization theories,
2. Shifts in emphasis in the study of the organization from economic and technical aspects to conceptual and human aspects, and
3. Focus on internal and external environments of the organization.


Related topics:
Management: Click Here
Management and Administration Click Here
Management as a profession
Classification of managerial skills
Nature of Management
Social Responsibilities of Management

Nature of Management

Nature of Management

Giving below some important points of Nature of Management.

1. Universality: Management is a universal phenomenon, in the sense, it is the common and essential element in all enterprises. Managers perform more or less the same functions irrespective of their position or nature of the organization. The basic principles of management can be applied in all managerial situations regardless of the size, nature and location of the organization. Universality of managerial tasks and principles also implies that managerial skills are transferable and managers can be trained and developed.

2. Purposeful: Management is always aimed at achieving organizational goals and purposes. The success of management is measured by the extent to which the desired objectives are attained. In both economic and non-economic enterprises, the tasks of management are directed towards effectiveness (i.e., attainment of organizational goals) and efficiency (i.e., goal attainment with the economical use of resources).

3. Social process: Management essentially involves managing people associated with an organization or a work group. It includes retaining, Developing and motivating people at work, as well as taking care of their satisfaction as social beings. All these interpersonal relations and interactions makes the management as a social process.

4. Coordinating force: Management coordinates the efforts of the members of an organization through the orderly arrangement of inter-related activities so as to avoid duplication and overlapping. Management reconciles the individual goals with the organizational goals and integrates human and physical resources.

5. Intangible: Management is intangible. It is an unseen force. Its presence can be felt everywhere by the results of its effort which comes in the form of orderliness, adequate work output, satisfactory working climate, employees satisfaction etc.

6. Continuous process: Management is a dynamic and on-going process. The cycle of management continues to operate so long as there is the need of organized action for the achievement of group goals exists.

7. Composite process: Functions of management cannot be undertaken sequentially, independent of each other. Management is a composite process made up of individual ingredients. All the functions are performed by involving several ingredients. Therefore, the whole process is integrative and performed in a network fashion.

8. Creative organ: Management creates an energetic effect by producing results which are more than the sum of individual efforts of the group members. It provides sequence to operations, matches jobs to goals, connects work to physical and financial resources. It provides creative ideas, new imaginations and visions to group efforts. It is not a passive force adopting to external environment but a dynamic life-giving element in every organization.
Related topics:

Definition of Management: Click Here
Management and Administration Click Here
Management as a profession
Management: Click Here
Classification of managerial skills
Social Responsibilities of Management
To read management stories please click here

Concept of Management

In simple, the process of collecting different types of resources, coordinating them and implementing them in the proper way to achieve the predetermined goals of the organization is known as management.

It can be described as Manage+men+T which means managing the men tactfully to achieve the goals.

Management is the attainment of organizational goals in an effective manner through planning, organizing, staffing, directing and controlling organizational resources.

Organization resources include money, materials, men (human beings), and machines.

As per Koontz H, "Management is the art of getting things done through and with the people in formally organized groups."

Management is the process of Planning, Organizing, Staffing, Directing and Controlling to accomplish organizational objectives through the coordinated use of human and material resources.

Features of Management

1. Management is an organized activity
2. Management is a group activity
3. Management is a distinct process
4. Management is both a science and an art
5. Management integrates human and other resources
6. Management principles are universal in nature
7. Management aims at the accomplishment of predetermined objectives

Management as a process with four functions

The four basic management functions are planning, organizing leading and controlling.

1. Planning and Decision Making
2. Organizing and Staffing
3. Leading
4. Controlling

Planning activity

Planning management

Importance of Management

• Achievement of Group Goals
• Human Development
• Optimum Utilization of Resources
• Stability
• Fulfillment of social Obligations

1. PlanningPlanning is the primary and most basic function of Management. It is a function of deciding in advance, what is to be done, when is to be done, how it is to be done and by whom it is to be done.

2. Organizing

The next step after planning is Organizing. The process of organizing consists of the following steps:

1. Defining and determining the activities to achieve the goal.
2. Grouping of activities as per nature and convenience. For example, engineering works can be given to the engineering department at the same time purchasing activities can be assigned to the purchasing department.
3. Dividing or assigning duties to people at various levels.
4. Defining and fixing responsibility for the higher performance
5. Delegating authority to people at different levels.

3. Leading consists of:

1. Supervision of work
2. Issuing orders and instruction
3. Communication with the team.
4. Motivation (encouraging subordinates to work together)
5. Leadership to influence the team to behave responsibly.

4. Controlling consists of:

1. Taking corrective action for the attainment of the goal.
2. Establishing standards for measurement of performance.
3. Measuring performance and comparing with the standard.
4. Finding reasons for variation among different team members performance.

Management Pyramid
1. Top Management, which include, Board of directors, President, Executive Vice president and vice president.
2. Middle Management: Which consists of Department heads, Plant Manager, Plant superintendent.
3. Lower Management: This level consists of Foremen and Supervisors.

© 2009 Siny J

What Is a Joint Venture? Advantages and Disadvantages of JV Business

Joint Venture

What is a Joint Venture?


When two or more persons join together to carry out a specific business venture and share the profits on an agreed basis it is called a 'joint venture'. Each one of them who join as a party to the joint venture is called 'Co-Venturer'. No firm name is normally used for the joint venture business because its duration is limited to a short period. During this period, the co-ventures are free to carry on their own business as usual, unless agreed otherwise. The business relationship amongst the co-venturer comes to an end as soon as the venture is completed. Thus, a joint venture is some kind of a temporary partnership between two or more persons who have agreed to jointly carry out specific venture. The joint ventures are quite common in the construction business, consignment, sale, and purchase of property, underwriting of shares and debentures, etc. For example, A and B agreed to construct a college building for which they pooled their resources and skill. A provided Rs. 6 lakh and B Rs. 4 lakh as capital. They completed the building and shared the profits in the ration of their contributions to capital. In this example, joining hands by A and B to construct a building is a joint venture. A and B are co-ventures. They will share the profits in the ration of 6 and 6 (same as the ratio of their capitals).


From the above, the essential features of a joint venture can be listed as follows:

1. It is formed by two or more persons.
   
2. The purpose is to execute a particular venture or project
   
3. No specific firm name is used for the joint venture business.
   
4. It is of a temporary nature. Hence, the agreement regarding the venture automatically stands terminated as soon as the venture is completed.
   
5. The co-venturers share profit and loss in the agreed ratio. However, in the absence of any other agreement between the co-venturers, the profits and loss are to be shared equally.
   
6. During the tenure of the joint venture, the co-venturers are free to continue with their own business unless agreed otherwise.

The main advantages of a joint venture are:

1. Sufficient Resources: Since two or more persons pool their resources, there is sufficient capital available.
   
2. Ability and Experience: In a joint venture the different venturers may be having different skills and experience. The benefit of their common wisdom will be available to the venture.
   
3. Spreading of Risk: The co-ventures agree to share the profits and losses in a particular ratio. The implies that the risk is also borne by them in that ratio.

Advantages and disadvantages of Joint Venture form of Business

When two or more business joins together to carry out a business by providing expertise and resources, it is called a joint venture. The risk and rewards are shared as per the proportion of the investment by the parties concerned.

The main advantages of a joint venture are:

1. More resources: since two or more firms join together to form a joint venture, there is the availability of increased capital and other resources.

2. Access to new markets: by engaging with a foreign collaborator, the products and services can be marketed in a foreign country.

3. New and improved Technology: One partner may have new and improved technology but do not have the resources. Another partner may have resources like capital but do not have the technology. In such cases, the joint venture can fetch new and improved technology as well as great resources. By engaging a foreign partner, improved foreign technology can be availed from its foreign collaborator.

4. Use of existing marketing arrangements or existing distribution network of one of the party is possible.

5. Access to improved resources like experienced technicians, experienced staff, greater capacity, financial resources etc. are possible through joint venture business.

6. Sharing of costs and risks with partners.

7. Diversification of business by producing new products or a new area of business.

8. Increased productivity and greater profits.

9. Exchange of Products: Joint venture companies can offer their existing product to sell through the partner's network and share the profit. Both JV partners can do the same. By exchanging products and services of the partner, they can diversify the product basket and sell it to their existing customers and increase the profit.

There many disadvantages in the joint venture form of business. They are:
1. It takes time and efforts to form the right relationship.

2. The objectives of each partner may differ. The objectives need to be clearly defined and communicated to everyone involved.

3. Imbalance in the share of capital, expertise, investment etc., may cause friction between the partners.

4. The difference in the culture and style of business lead to poor co-operation.

5. Lack of assuming responsibility by the partners may lead to the collapse of the business.

6. Lack of communication between the partners may affect the business.

Some related topics

• Nature of Management
  This article explains the administrative theory of the Nature of Management, Concept of Management, Function of Management, Features of management and the Importance of Management in a practical way. After reading you will understand the basics of 
•  
• Social Responsibility of Management and Responsibilities of Managers
  The term "social responsibilities" can be defined as the obligation of management towards society and others. Reason for Social Responsibilities: Business enterprises are creatures of society and should respond to the demands of society.
•  
• Managerial Functions
  This article explains the administrative theory of the Five Functions of Management in a practical way. After reading you will understand the basics of these powerful principles of management.

Managerial Functions

Managerial Functions

The functions which describe the managerial job, when put together, make up the management process. This process is categorized into key functions of management viz., planning, organizing, staffing, directing and controlling.
Planning, organizing and controlling which deal mostly with non-human aspects are known as mechanics of management, whereas staffing and direction which are primarily concerned with human aspects constitute dynamics of management. In the conceptual scheme, though the functions are listed out in a sequence, in practice they are interlocked as a system. As all functions are not equally important for all managers, time spent by them for each of these functions varies according to their levels in the organization. These functions have been discussed below:

1. Planning: Planning refers to anticipate the opportunity, problems, and conditions and choosing from among the alternative future courses of action. The planning process generally includes the following activities.
   
   
   
   1. Forecasting is looking ahead to anticipate the opportunity, problems, and conditions in a future period of time.
      
      
   2. Establishing objectives means setting the end results to be accomplished by directing organizational efforts.
      
      
   3. Programming is establishing sequence and priority of actions to be followed in the attainment of the objectives.
      
      
   4. Scheduling is deciding on time sequence for program steps.
      
      
   5. Budgeting is the allocation of resources to minimize costs.
      
      
   6. Establishing procedures means developing and applying standardized methods of performing specific work.
      
      
   7. Developing policies involve establishment and interpretation of standing decisions that apply to repetitive questions and problems of significance to be the organization as a whole.
      
      

Organizing function

1. Organizing function: The organizing function of management is the process of defining and grouping of activities and creating authority relationship among them. It consists of
2. 1. 
      Developing the organization structure which involves identification of task and grouping them into units or departments for performance.
      
      
   2. Delegating authority to the managers and making him responsible for group performance.
      
      
   3. Establishing relations creating conditions necessary for mutually cooperative efforts of people in the organization.
      
      
      
3. Staffing: Planning the organization with suitable personnel constitutes the staffing function. It involves the selection, training and development, compensation, and appraisal of subordinates by the manager. Manpower planning and manpower management looks after these activities and try to ensure suitable methods of remuneration and performance appraisal of the employees.
   
   
4. Directing Function: involves managing people and the work through the means of motivation, proper leadership, effective communication, and coordination. A manager must develop the ability to command. He should issue orders and instructions without arousing any resentment among the subordinates. He must be able to secure willing obedience from his subordinates without destroying their initiative and creativity. Moreover, it requires a sound communication system to enable the exchange of ideas and information for common understanding.
   
   
5. Controlling Function: enables management to ensure that achievement is in accordance with the established plans it involves:
   
   
   
   1. Establishing performance standards for evaluating results.
      
      
   2. Performance on the basis of records and reports on the progress of work.
      
      
   3. Performance evaluation against the standards set.
      
      
   4. Corrective action to regulate operations, remove deficiencies and improve performance
      

5. Commanding function.

The commanding function consists of giving clear orders to employees so that without any doubt they will understand what is expected to be done and how is it to be done. These orders should stimulate dynamism, discipline, and motivation in the employee. The basic necessity of the commanding function is the ability to communicate with the employees and making sure that they are completing the work within the stipulated time and cost. The skill of encouraging the team members and motivating them to do the function in an effective manner is included in this function.

Social Responsibility of Management and Responsibilities of Managers

Social Responsibilities of Management

The term "social responsibilities" can be defined as the obligation of management towards society and others.


Reason for Social Responsibilities: Business enterprises are creatures of society and should respond to the demands of society. If management does not react to changes in social demands, the society will either force them to do so through laws or will not permit the enterprise to survive. Therefore, the longterm interests of businesses are best served when management assumes social responsibility. The image of a business organization depends on the quality of its products and customer service; and the extent to which it fulfills the expectations of owners, employees, consumers, government, and the community at large. For long-term success it matters a great deal if the firm has a favourable image in the public mind. Every business enterprise is an organ of society and its activities have impact on the social scene. Therefore, it is important for management to consider whether their policies and actions are likely to promote the public good, advance the basic values of society, and add to its stability, strength, and harmony.

Besides taking care of the financial interest of owners, managers of business firms must also take into account the interests of various other groups such as employees, consumers, the government, and the community as a whole. These interested groups are directly or indirectly affected by the pursuit of business activities and they are the stake-holders in the enterprise.




Responsibility towards owners: The primary responsibility of management is to assure a fair and reasonable rate of return on capital and fair return on investment. With the growth of business, shareholders can also expect appreciation in the value of their capital.


Responsibility towards employees: Responsibility towards employees relates to fair wages and salaries, satisfactory work environment, labour management relations, and employee welfare. Fair wages should be fixed in light of labor productivity, the prevailing wage rates in the same or neighbouring areas, and relative importance of jobs. Managers' salaries and allowances are expected to be linked with their responsibility, initiative, and skill, but the spread between minimum wages and highest salaries should be reasonable. Employees are expected to build up and maintain harmonious relationships between superiors and subordinates. Another aspect of responsibility towards employees is the provision of welfare amenities like safety and security of working conditions, medical facilities, housing, canteen, leave, and retirement benefits.


Responsibility towards consumers: In a competitive market, serving consumers is supposed to be a prime concern of management. But in reality, perfect competition does not prevail in all markets. In the event of shortage of supply there is no automatic correction. Besides, consumers are often victims of unfair trade practices and unethical conduct of business. Consumer interests are thus protected to some extent by laws and the pressure of organized consumer groups. Management should anticipate these developments, satisfy consumer needs, and protect consumer interests. Goods must be of appropriate standard and quality and be available in adequate quantities at reasonable prices. Management should avoid resorting to hoarding or creating artificial scarcity, as well as false and misleading advertisements.


Responsibility towards the government: As a part of their social responsibility, management must conduct business lawfully, honestly pay all taxes and dues, and should not corrupt public officials for selfish ends. Business activities must also confirm to the economic and social policies of the government.


Responsibility towards the community and society: The socially responsible role of management in relation to the community is revealed by its policies with respect to the employment of handicapped persons, weaker sections of the community, environmental protection, pollution control, setting up industries in backward areas, and providing relief to the victims of natural calamities etc.

How to Write a Cheque Book Request Letter

How to write a Cheque Book request letter

December 05, 2017
The Manager
HDFC Bank
Nehru Place
New Delhi


Sub. : Cheque Book Request
Ref.: Saving Bank Account No. 0000xxxxx00000


Dear Sir,

I am holding the Saving Bank A/c No. 0000xxxxx00000 with your branch. I hereby request you to please issue a checkbook and send the same to my mailing address with you.


Thanking you,
Yours sincerely,



(Raja Rai)
R/o 8833 Nehru Enclave
Kalkaji
New Delhi – 110 119
Mobile: 0000000000

How to write an authorization letter to withdraw money from the saving account

05 December 2017


To,
The Manager
Axis Bank Ltd
Nehru Place, New Delhi-110019


Authority Letter for withdrawing money from my savings account No. - 000000000000


Dear Sir,


Greetings!


I hereby authorize Mr. Amit Sharma, bearer of this letter to withdraw amount Rs. 24,000/- from my above savings account. I am enclosing herewith the self Cheque No. 2222222 dated 05.12.2017 for the same. You are requested to hand over the money to him.




His signature is attested herewith.



                                                                                      _______________________
                                                                                 Signature of Mr. Amit Sharma
 

With best regards,
Raja Rai
R/o 88 33 Nehru Enclave
Kalkaji
New Delhi – 110 119
Mobile: 0000000000

Sample Letter: Request for bank statement

04 November 2018


The Manager
State Bank of India
Bangalore, 560001


Dear Sir,


Sub: Request for Copy of Bank Statement
Ref: Account No. 0000222200220022


In searching through my files, I am unable to locate my bank statement for the month of October 2018 on the above-referenced account. I would, therefore, appreciate it if you would please send a copy of this statement to the address herein.


Thank you for your prompt attention to this request. If you have any questions, please do not hesitate to contact me at my registered mobile number 8888888888.

Regards,




Imran Khan
Flat No. 123
Bangalore-560019

Sample Letter: Request for bank statement hand over to authorized person

04 November, 2018

The Manager
State Bank of India
Bangalore, 12


Dear Sir,

Sub: Request for Copy of Bank Statement
Ref: Account No. 0000222200220022

In searching through my files, I am unable to locate my bank statement for the for the FY 2017-18) on the above-referenced account. I would, therefore, appreciate it if you would please send a copy of this statement to the bearer of this letter whose signatures are attested below:




Signature of Mr. Aslam Khan




–---------------------
Signature Attested



Thank you for your prompt attention to this request. If you have any questions, please do not hesitate to contact me at my registered mobile number 8888888888.


Regards,



Imran Khan
(Address of the account holder)Flat No. 123
Street No. 123
Bangalore-560 019

Distinction Between Market Economy and Centrally Planned Economy

The central or basic economic problem can be solved by two ways:

1. By free interaction of individuals pursuing their objectives as is done in the market or
   
2. In a planned manner by some central authority like Government.
   
   

Let us discuss about it.


Market Economy
A market-oriented economy also called capitalist economy is one in which all economic activities are organized through the market. A market is a place where buyers and sellers meet together and through free interaction they sell or purchase the goods or services.


Through price mechanism free market economy operates. Price mechanism is a mechanism by which the price of a product or service determined based on the demand and supply. Competition is the characteristic feature of the Market Economy as there is no interference by the Government. 


The central problems of 'what, how and for whom to produce' are solved by price mechanism in a market oriented economy. Consumers choice plays an important role in the price determination and the quality and quantity of production. Demand of a product increases the price of that product which is a positive signal for the producers to produce more of that particular product. At the same time decrease in price signals the producers to reduce the production as demand goes down. It is evident that customers look for quality and run after goods which is of good quality. This quality conscious determines the method of production and solve the central problem of 'how to produce'. This market economy system solves the central problem of 'what and how much to produce.'


By adopting those technology of production which reduces the cost of production and by controlling the cost of factor inputs solves the central problem of 'how to produce.' The central problem of 'for whom to produce' can be solved by the free play of market forces which guide the producers how the output produced by factors is distributed among the factors of production in the form of wages, rent, interest and profit. 

In a market economy, it is the market price of the commodity which guides the producer to solve the problem of 'what, how and for whom to produce.'
To reduce the disorders like inequalities of price, income, monopolies, unemployment, exploitation of poor by the rich, Government is compelled to intervene in the economy and regulate market mechanism through state control and planning.

Centrally Planned Economy

A centrally planned economy is one in which all important activities are planned and decided by the government or the central planning authority. To choose and the choice is the essence of an economic activity. To plan is to act with a purpose. Here the central authority generally known as planning commission appointed by Government solve the central problems of 'what, how and for whom to produce' by the conscious decisions taken by them.
Planning Commission decides how much should be produced/consumed and which goods are to be produced in the economy within a given period of time. The problem of how to produce is solved by choosing the method of production to be adopted in the factories owned by the government. Since these factories are owned by the Government they decide the compensation for various skills and compensation for other factors of production. This solves the problem of 'for whom to produce'.


It is the Central Planning Authority which solves all the central problems by incorporating the solutions in the plan itself. It is to be noted that China and Soviet Union were centrally planned economies in the past but today they are moving towards the Market System.


In the present there is no economy which is hundred percent market oriented or centrally planned because both the government sector and private sector plays more or less equal roles in the functioning of the economy. Modern economies are mixed economies in which central problems are solved partly through market/price mechanism and partly through direct planning.