CAIIB ABM 2023 FREE SHORT NOTES | ECONOMIC ANALYSIS
This article takes you through some of the fundamental concepts of economics which you must know when going through the CAIIB 2023 Syllabus that has duly been prescribed by the Institute. This article also works as a short note on the fundamentals of economics.
ECONOMIC CONCEPTS
Even though having a basic understanding of Economics isn’t something that is taken to be as important as understanding how to balance a household budget or doing any other practical work, the forces which impact every moment of our lives are explained by economics.
The four main concepts of Economics are:
- Scarcity
- Supply & demand
- Incentives
- Costs & benefits
These concepts explain the reasons why humans do what they do.
- SCARCITY
The basic meaning of scarcity is that the resources are limited. These limited resources cannot meet the unlimited wants of people. So, everyone knows of this fact whether they realize it consciously or unconsciously.
This knowledge of scarcity has forced people to allocate the limited resources in the most efficient way so that all the priorities can be met without getting short on resources.
For example, there is only so much rice that can be grown every year. Some people would want rice & some would prefer beer. So, because of the scarcity of the resources, they can be used while considering the limited availability of the resources. So, one has to decide how much rice should be used for direct consumption and for indirect consumption (beer). This problem is solved by taking advantage of the market system which is driven by demand and supply.
- SUPPLY & DEMAND
The forces of demand and supply are what run the market system.
For example: If people want to buy beer, its demand is considered to be high. And because its demand is high and many people want it, one can charge more price for the beer and can make more money by using rice to make more beer than using it to make flour.
And hypothetically, the production of more beer will increase because people want to earn more. After a few production cycles of beer, the supply of beer will increase in the market leading to a drop in the price of beer.
This is just an extreme example, but to make it easy to understand, this concept of demand and supply can be explained by the fact that last year’s popular product is available at half of its price in the next.
III. COSTS & BENEFITS
‘Costs and benefits’ is related to the theory that an average consumer is rational and wants the best of what is available in the market which is also one of the basic assumptions of Economics.
When it is said that people are rational, it means that people are trying to get the maximum benefit at the lowest cost.
When the demand for beer is high, more workers will be employed to make more beer. The only condition for the above situation to come true is that it will happen when the price and the amount of beer justify the additional cost of additional employment and in the materials which are needed to make more beer.
In the same way, a person will buy the best beer which he or she can afford but perhaps not the best tasting beer which is available in the market.
This concept is also applicable when other non-financial decisions are taken.
For example, Students also do cost-benefit analyses when they have to choose from certain available courses which they think to be of more importance for success. There are times when it also means cutting down the time on a course which they think to be of less importance.
IRRATIONALITY
Even though it is always assumed (in economics) that people act rationally, there are still people who make decisions based on emotions instead and which does not really maximize their benefit.
For example, Advertising is something that always preys on the human tendency to act non-rationally as commercials try to activate the brain’s emotional center to fool them into overestimating the benefits of an advertised item.
- EVERYTHING IS IN THE INCENTIVES
As a parent, a teacher, a boss, or anyone who is responsible for overlooking other people, you might probably be in a situation where you offer a reward or an incentive so as to increase the likelihood of a particular outcome.
Incentives of economic nature explain the operation of supply & demand as to how they encourage the producers to provide or increase the supply of goods that are in high demand. So, when there is an increase in the demand for goods, the market prices of pink goods increase and produce an incentive to produce more of those goods because they will receive a higher price.
For example:
In the case of a brewery, if the owner wants to increase the production of beers so that they can for more years it will lead to an increased income. The owner is producing bottles of 2 sizes: 500ml and 1000ml. In a couple of days, there is an increased production of the number of bottles from 20000 to 30000 per day.
Now the problem is that the incentive they have provided is focusing on the wrong thing i.e number of bottles instead of the volume of beer. The owner gets to receive calls from the suppliers asking when the 1000 ml bottles will be available. If he offers a bonus for the number of producers that are being produced, he can benefit from completing the shifts by only producing the bottles of smaller sizes.
Businesses can achieve their organizational goals by correctly aligning the incentives. These incentives can be in the form of profit-sharing, employee stock options, and performance bonuses. Although if these incentives are not aligned properly with the organizational goals the situation could lead to different results.
Scarcity or limited resources is what all Economics is based on. We humans constantly choose by determining the cost and benefits.
The above-mentioned economic concepts explain many of the diseases which are made by humans on a regular basis. Scarcity is one of the biggest problems that this world is facing because of its limited wants and is forcing the people to make decisions about the allocation of resources.
