Monday, September 1

Concepts of Economics, Demand and Supply Analysis

Subject Wise Study Resources for Banking Diploma Examination - JAIBB

Paper 1: Principles of Economics and Bangladesh Economy

Module A: Concepts of Economics and Demand Supply Analysis

Q1.      Law of demand and supply definition, examples and graph.

The four basic laws of supply and demand are: 
  • If demand increases (demand curve shifts to the right) and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.
  • If demand decreases (demand curve shifts to the left) supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.
  • If demand remains unchanged and supply increases (supply curve shifts to the right), a surplus occurs, leading to a lower equilibrium price.
  • If demand remains unchanged and supply decreases (supply curve shifts to the left), a shortage occurs, leading to a higher equilibrium price. 
The Law of Demand: The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded.

The Law of Demand
Fig: The Law of Demand
In the diagram below, you see this relationship. At price P1, the quantity of that good demanded is Q1. If the price of this good were to be decreased to P2, the quantity of that good demanded would increase to Q2. The same is true for P3 and Q3. When prices move up or down (assuming all else is constant), the quantity demanded will move up or down the demand curve and define the new quantity demanded.

The Law of Supply
Figure: The Law of Supply
The Law of Supply: Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied.

In the diagram below, you can see that as the price shifts from P1 to P2, the quantity supplied of that good shifts from Q1 to Q2. The movement in price (up or down) causes movement along the supply curve and the quantity demanded will change accordingly.

Q2.      Market equilibrium definition, Market equilibrium in economics. 

Market equilibrium is a market state where the supply in the market is equal to the demand in the market. The equilibrium price is the price of a good or service when the supply of it is equal to the demand for it in the market. If a market is at equilibrium, the price will not change unless an external factor changes the supply or demand, which results in a disruption of the equilibrium.

Market equilibrium in this case refers to a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. This price is often called the competitive price or market clearing price and will tend not to change unless demand or supply changes and the quantity is called "competitive quantity" or market clearing quantity.

Q3.      Definition of shortage and surplus in economics. Difference between shortage and surpluses:

The existence of surpluses or shortages in supply will result in disequilibrium, or a lack of balance between supply and demand levels.

Simply a surplus is when there is EXCESS, or too much of a resource/product/item. In economics a Market Surplus occurs when there is excess supply- that is quantity supplied is greater than quantity demanded.  In this situation, some producers won't be able to sell all their goods.  This will induce them to lower their price to make their product more appealing.  In order to stay competitive many firms will lower their prices thus lowering the market price for the product.  In response to the lower price, consumers will increase their quantity demanded, moving the market toward an equilibrium price and quantity.  In this situation, excess supply has exerted downward pressure on the price of the product.

Simply a shortage is when there is a LACK (not enough) of that particular resource/product/item. In economics a Market Shortage occurs when there is excess demand- that is quantity demanded is greater than quantity supplied.  In this situation, consumers won't be able to buy as much of a good as they would like.  In response to the demand of the consumers, producers will raise both the price of their product and the quantity they are willing to supply.  The increase in price will be too much for some consumers and they will no longer demand the product.  Meanwhile the increased quantity of available product will satisfy other consumers.  Eventually equilibrium will be reached.

Q4.      How is a price floor different from a price ceiling? Explain Price Ceiling and Floor.

Effect of Price ceiling
Figure: Effect of Price ceiling
Price ceiling: A price ceiling is a government-imposed price control or limit on how high a price is charged for a product. Governments intend price ceilings to protect consumers from conditions that could make necessary commodities unattainable. However, a price ceiling can cause problems if imposed for a long period without controlled rationing.

If the price ceiling is above the market price, then there is no direct effect. If the price ceiling is set below the market price, then a "shortage" is created; the quantity demanded will exceed the quantity supplied.

Price floor: A price floor is the lowest legal price a commodity can be sold at. Price floors are used by the government to prevent prices from being too low. The most common price floor is the minimum wage--the minimum price that can be payed for labor. Price floors are also used often in agriculture to try to protect farmers.

When a "price floor" is set, a certain minimum amount must be paid for a good or service. If the price floor is below a market price, no direct effect occurs. If the market price is lower than the price floor, then a surplus will be generated.

Q5.      Price elasticity of demand.

Price elasticity of demand or PED or Ed is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price.

Price elasticity of demand measures the responsiveness of demand to changes in price for a particular good. If the price elasticity of demand is equal to 0, demand is perfectly inelastic (i.e., demand does not change when price changes). Values between zero and one indicate that demand is inelastic (this occurs when the percent change in demand is less than the percent change in price). When price elasticity of demand equals one, demand is unit elastic (the percent change in demand is equal to the percent change in price). Finally, if the value is greater than one, demand is perfectly elastic (demand is affected to a greater degree by changes in price).

For example, if the quantity demanded for a good increases 15% in response to a 10% decrease in price, the price elasticity of demand would be 15% / 10% = 1.5. The degree to which the quantity demanded for a good change in response to a change in price can be influenced by a number of factors. Factors include the number of close substitutes (demand is more elastic if there are close substitutes) and whether the good is a necessity or luxury (necessities tend to have inelastic demand while luxuries are more elastic).

Sunday, August 31

Concepts of Economics, Demand and Supply Analysis

Subject Wise Study Resources for Banking Diploma Examination - JAIBB
Paper 1: Principles of Economics and Bangladesh Economy

Module A: Concepts of Economics and Demand Supply Analysis

Q1.      What is Economics? Definition of Economics:

Economics is the social science that deals with the production, distribution and consumption of goods and services and with the theory and management of economies or economic systems.

Alfred Marshall provides a still widely cited definition in his textbook Principles of Economics (1890):

“Economics is a study of man in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man.”

Q2.      Scarcity and Choice:

Scarcity is the fundamental economic problem of having seemingly unlimited human wants in a world of limited resources. Scarcity means that people want more than is available. Scarcity limits us both as individuals and as a society. As individuals, limited income (and time and ability) keep us from doing and having all that we might like. As a society, limited resources (such as manpower, machinery, and natural resources) fix a maximum on the amount of goods and services that can be produced.

Scarcity means we all have to make choices: Because of scarcity, choices have to be made by consumers, businesses and governments. For example, over six million people travel into London each day and they make choices about when to travel, whether to use the bus, the tube, to walk or cycle – or whether to work from home. Millions of decisions are being taken, many of them are habitual – but somehow on most days, people get to work on time and they get home too!

Q3.      What is Opportunity cost? Explain with example:

Opportunity cost is the cost of a foregone alternative. If you chose one alternative over another, then the cost of choosing that alternative is an opportunity cost. Opportunity cost is the benefits you lose by choosing one alternative over another one. The opportunity cost of choosing one investment over another one.

The term opportunity cost is often used in finance and economics when trying to choose one investment, either financial or capital, over another. It is a measure of any economic choice as compared to the next best one.

Examples of Opportunity cost:

There is an opportunity cost over choosing an investment in bonds over an investment in stocks.

Here's another example: If a gardener decides to grow carrots, his or her opportunity cost is the alternative crop that might have been grown instead (potatoes, tomatoes, pumpkins, etc.).

Q4.      Difference between micro and macro economics:   

Microeconomics: Microeconomics is a branch of economics that studies the behavior of individuals and small impacting organizations in making decisions on the allocation of limited resources. This could mean studying the supply and demand for a specific product, the production that an individual or business is capable of, or the effects of regulations on a business.

Microeconomics is concerned with:
  • Supply and demand in individual markets
  • Individual consumer behaviour. e.g. Consumer choice theory
  • Individual labour markets – e.g. demand for labour, wage determination
  • Externalities arising from production and consumption.
Macroeconomics: Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets. Macroeconomic theories usually relate the phenomena of output, unemployment and inflation.

Macroeconomics is concerned with:
  • Monetary / fiscal policy. e.g. what effect does interest rates have on whole economy?
  • Reasons for inflation, and unemployment
  • Economic Growth
  • International trade and globalisation
  • Reasons for differences in living standards and economic growth between countries.
  • Government borrowing

Wednesday, August 27

DAIBB Syllabus – Management Accounting

Syllabus of Diplomaed Associate of the Institute of Bankers, Bangladesh (DAIBB):

Paper 5: Management Accounting:
Full Marks: 100

Module A: Definition and Scope of Management Accounting:
  • The Place of Management Accounting/Short comings of The Traditional Methods of Credit Analysis
  • Its Definition and Scope, Distinction between Financial Accounting and Management Accounting – Role of Management Accountant – Analysis and Interpretation of Finance Statements.
  • Planning Process
  • Setting of Objectives 
Module B: Costing and Pricing:
  • Methods of Costing – Classification of Costs – Implication of Costing for Bankers
  • Objectives of Pricing – Common Misconceptions in Pricing – Cost, Volume, Profit Relationship – Break-Even Analysis – Limitations of Break-Even Analysis – Planning for Profit.
Module C: Budgeting and Expenditure:
  • Importance of Budgeting
  • Objectives of Budgeting – Preparation of Budgets – Importance of Budgets to Bankers, Standard Costing Control through Budgets.
  • Method of Appraisal; Shortcomings of Appraisal Methods – Capital Budgeting – Its Importance to Lending Banker. 
Module D: Planning for Liquidity:
  • Cash Flow Forecast – Objectives of Cash Flow – Preparing A Cash Flow Forecast/Using The Cash Flow/Cash Flow Forecast and Lending Banker.
  • Statement of Sources and Application of Funds 
Module E: Working Capital Management:
  • Factors Affecting Working Capital Requirements – Short Term Financial Forecasts – Assessment of Working Capital – Production and Operating Cycle – Inventory Management – Cash and Receivables Managements – Methods of Financing Working Capital – Different Forms of Bank Credit – Management Reports – Types of Information and its Relevance to Banks 
Module F: Leasing and Hire Purchase:
  • Financing Against Lease Forms of Lease Financing – Economics of Leasing-Financing against Hire Purchase Agreements – Relative Merits of Leasing Finance and Hire Purchase Finance from Customer’s and Lending Bank’s Point of View 
References/ Books:
  • Bhattacharya, S. K. and John Deanden – Accounting for Management : Texts & Cases Hingorani & Chawla. Management Accounting (Indian Institute of Bankers, Published by Himalaya Publishing House, Mumbai, India).
  • Egginton, D. A. – Accounting for the Banker, (Longman).
  • Fisher, J. – Financial Analysis and Management Accounting for the Banker (The Institute of  Bankers in Scotland).
  • Kuchhal, S. C. – Financial Management – An Analytical & Conceptual Approach.
  • Khan, Md. Mainuddin – Advanced Accounting (Ideal Library Dhaka).
  • Pitcher, M. A. – Management Accounting for the Lending Bankers.