CAIIB FREE NOTES ON FUNDAMENTALS OF ECONOMICS FOR 2023 CAIIB EXAMS

CAIIB FREE NOTES ON FUNDAMENTALS OF ECONOMICS FOR 2023 CAIIB EXAMS

FUNDAMENTALS OF ECONOMICS

ECONOMICS 

In economics, we deal with the decisions relating to the production of goods and services, the allocation and use.

DEFINITIONS OF ECONOMICS BY: 

• Adam Smith, also known as the father of modern economics, economics means: 

Economics: ‘An Enquiry into the Nature & causes of the wealth of Nations’

According to him, economics can be defined as the study of wealth which is now taken as wealth definition.

• Alfred Marshall, who is known to bring up economics as a welfare concept (Welfare definition), economics according to him:

“Economics is the study of mankind in ordinary business life.”

As per his definition, importance is given to the study of mankind rather than the physical resources.

• Lionel Robbins, who defined economics in its scarcity concept: (Known as Scarcity Definition), Economics has been defined as:

“Economics is the science which studies human behavior as a relationship between end and scarce means which have alternative uses.”

As per is definition, it can be understood that: 

A man has unlimited wants while there are limited resources through which humans can be satisfied along with the fact that resources are not only limited but they have many alternative uses. Therefore, choices are to be made.

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MEANING OF ECONOMICS: 

As mentioned earlier, it is social science which is concerned with the production, distribution and consumption of resources. It basically studies how businesses, governments, individuals and whole nations allocate the sources which are available to them. 

Its main focus lies on the actions of human beings which is based on the assumptions that humans will behave rationally so as to seek the maximum benefit or utility from the available resources. Labour and trade are the building blocks of Economics. Because there are so many different ways through which labour can be utilised and resources can be acquired, economics helps in determining which method will provide the best result. 

MICROECONOMICS AND MACROECONOMICS AND TYPES OF ECONOMIES

Economics can be categorised into two different categories: 

• Microeconomics 
• Macroeconomics 

Microeconomics: In this branch of economics, specific segments and Markets of the economy. It addresses issues like behaviour of consumer, new dual labour market and theories related to firms. Basically, it studies the choices which are made by the individual consumers as well as businesses in the light of changing cost of goods and services in an economy.

There are several aspects which are covered by the micro economics such as: 

• Demand and supply of goods and services in different markets 
• Behaviour of consumers as individual as well as a group 
• Demand for the service and labour (including labour markets) and determinants like employee’s wages.

Bottom-up approach is adopted in microeconomics for the analysis of the economy. Its main focus lies on the casual situations whenever there is a certain change in existing conditions which leads to changes in the experiences of the Marketplace.

Micro economics consists of different components which are mentioned below: 

• Demand and supply in the market 

• Behavior of consumer 

• Producers, to make available the products as per the preferences of individuals 
• Market specific labour markets

Macroeconomics: This branch of economics studies the economy as a whole. We look at the variables in aggregation such as aggregate demand, output of the nation and inflation in the economy.

Studies the progress which is made by an economy & steps taken by the nation. Study of policies and other factors which influence the economy as a whole are also studied in microeconomics. 

A top to down approach is followed in in macroeconomics which involves strategies such as: 

• Overall country’s economic growth 
• Reasons that can influence on employment and inflation 
• Fiscal policies which will influence interest rates 
• Effect of International Trade and globalization 
• Reasons that result in variation in the economic growth which is achieved by different countries.

Another thing that macroeconomics focuses on is aggregate growth and its economic correlation. 

Macroeconomics consists of different components mentioned underneath: 

• Unemployment 
• Inflation in the economy 
• National output

INTERDEPENDENCE OF MICROECONOMICS AND MACROECONOMICS ON EACH OTHER.

Economics has two parts: Microeconomics and macroeconomics. These parts or not interrelated but are mutually exclusive. Although a close connection exists between these two parts of Economics. Microeconomics studies to get a better understanding of micro and Macro Economic variables which will ultimately help in the formulation of economic policies and programs. In Vino how small- and large-scale elements can bring changes and results in the processes in the economy because they have the capacity to factory each other or are directly affected by each other. 

In simple words, an increase in the tax is a macroeconomic decision while the impact of the tax increase on the savings of the firms is a part of microeconomic analysis.

It can be understood with the help of the following example:

If we understand how the prices are determined and how buyers and sellers play a role of their own in the determination of prices, then it would certainly help in analysing the changes which take place in the price level of all the commodities in the economy as a whole.

If we study how the prices of commodities are determined and the role of buyers and sellers in this whole process, it can be called microeconomics. But if we were to study the general price level in economics, it would be called a macroeconomic process.

In the similar way, if we want to study how the economic performance is determined, we will first need to find out how much each sector of the economy is performing and for that purpose we have to find out how each sector is performing individually or in the groups. 

So, the study of each sector of a production unit or each group is a study of microeconomics while the study of all the sectors is a study of macroeconomics. 

This way, microeconomics and macroeconomics are interrelated and both are very much important to study Economics.