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