Types of Economics and Basic Economic Problems: JAIIB E-Book

Types of Economics and Basic Economic Problems: IIBF has recently changed the syllabus and exam pattern for JAIIB. These changes will be in effect from the JAIIB 2023 May/June cycle. According to the new pattern, there will now be four papers. These are: Indian Economy and Indian Financial System, Priciples and Practices of Banking, Accounting and Financial Management for Bankers, and Retail Banking and Wealth Management.

This blog will provide notes on the Types of Economics and Basic Economic Problems. This is a topic in the Module A of Indian Economy and Indian Financial System. You will learn about the two different ways in which economics can be broadly studied. You will also learn about the various problems and factors that are influence any economy.

Types of Economics and Basic Economic Problems

Why do we study economics?

Economics helps you to think strategically and make decisions to optimise the outcome. Especially in demand are people who have studied Economics and Finance as they are particularly well-prepared for jobs in banking and the financial sector, such as in accountancy firms.

Types of Economics

Economics is a broad field of study and as a result, has to be divided into parts. This makes it easier to study behaviours for specific aspects of an economy and also analyse the overall behaviour.

Micro-Economics

It is a study of the behaviour of individual units of an economy such as individual consumers, producers etc. It monitors the following factors-

• Demand
• Supply
• Market
• Price

Macro-Economics

It is a study of the behaviour of the economy as a whole. The following factors are the benchmarks when it comes to macroeconomics:

• Government policies
• International Trade
• Socio-economic factors

What are the basic economic problems?

There are three main problems in an economy-

1. What to produce
2. How to produce
3. Who to produce for 

1. What to Produce

The main problem in an economy would be deciding what should be produced. For any society, it is necessary to prioritise their production depending on various factors. Broadly, these are-

1. Demand
2. Supply
3. Resources

Let’s see these in detail:

Demand:

The main indicator of the requirement of a product is its demand. A product in high demand injects money into the economy and hence should be a bigger priority. For any nation, there are some sectors for which production has to be the top priority by default. These are mainly agriculture, infrastructure, healthcare, education and security. These are some of the biggest movers of an economy and it is essential that nations invest in these. After all having food, housing, health, skills and safety instantly increase the quality of life of the citizens. This in turn encourages spending and develops a healthy economy. 

Supply:

The supply of goods and services is necessary to meet demand. In every economy, it is hardly possible to meet the demands of every single citizen. Hence the needs of the majority have to be prioritised when supplying the goods and services. For underdeveloped and developing countries these are basic amenities that all require for living quality life. In developed countries, the requirements become less basic and more specific for enhancement of life quality.

Resources:

One of the biggest deciding factors for an economy is the resources at its disposal. Countries that possess significant amounts of natural resources develop a lot faster. This is because they do not have to depend on any other nations for their production. Middle Eastern countries are a great example of this.As they possess a sizable amount of the natural oil resources of the world, these economies are flourishing and advancing in development. The limit of resources limits production.

2. How to Produce

Production is a vital sector in any economy. The ability to produce your own goods and services provides a huge boost in growth and development that is independent of outside assistance. Production depends on a number of factors. These are:

1. Labour
2. Capital
3. Technology
4. Land and other natural resources

Based on these, there are four types of productions found in economies-

Labour Intensive Production:

This type of production is prevalent in economies having availability of excess and cheap labour. It involves a greater dependency on labour than on capital and technology. Mainly found in developing economies.

Capital Intensive Production:

This type of production depends more on capital than on labour. This mainly includes far more use of machinery and equipment thans in labour intensive production. Commonly seen in developed economies where labour is expensive and money can be comfortably allocated for expensive equipment for greater level of production.

Technology Intensive Production:

Involves a greater investment in robotics and automation based production methods. This is mainly a part of industries that require great efficiency and precision in the production process.

Traditional Production:

Industries that depend on human creativity and expertise over anything else employ traditional methods of production. This includes handcrafts, handwoven clothing, art, etc.

Depending on the availability and quality of labour, the affordability of capital, the advancement of technology and the type of product being produced, any of these production methods maybe employed. The same economy can have any of these, a combination or even all of these production methods being employed in different industries.

3. Who to Produce for

The demand, the supply and the production are all for one thing- for the consumers. So for any economy a pivotal step towards development is identifying the consumers who generate a greater amount of common demand which is possible for the production to meet at the earliest. The flow of the process looks something like this:

   

Factors affecting Consumption

Consumption is the process of products being purchased/used by consumers. The greater the consumption, the greater the demand for a product. A number of factors affect consumption in economies. These are a few of the factors-

1. Prices
2. Demand
3. Availability
4. Quality
5. Wages and Living

Prices

The price of a commodity in a market is usually referring to the price at which it is sold to the consumers. This is also called the selling price. The price is usually marked taking into account a variety of factors, including cost of production, labour, and margin of profit. Consumers usual behaviour is to go for products that cost them lesser. Lower prices increase demand.

Demand

Demand is the biggest indicator of consumption. Any commodity in demand is sure to have high consumption. All basic amenities such as food, infrastructure, education, etc are constantly in high demand. Especially with the booming population this demand only increases. Hence why big parts of an economy’s budget should be allocated in these sectors and industries, especially for a developing country.

Availability 

Any commodity that is low in availability tends to have greater demand. Because consumers typically tend towards rarer products. This behaviour is usually used by marketers to generate demand for a product by creating artificial scarcity for the product. Products that a scarce tend to be marked at a higher price which consumers are ready to pay for. This means the availability of alternatives of the same product reduce its demand. This is because there will always be alternatives that are priced lower and consumers will prefer that product. 

Quality

The better the quality of a product, commodity or service, the more it’s demand.This is simply because consumers are willing to pay a higher price for a product they feel will serve them better. Quality products also mean durability and less buying of replacements, ie. they are value for money. As such consumers like better quality products to be a once-in-a-while investment that they can trust.

Wages and Living

Consumers’ ability to buy will always be dictated by their income and quality of living. Lower income groups have different demands than higher income groups. This disparity also creates products that consumers of specific income tend towards. An economy whose consumers receive a good wage has consumers who are able to provide for their basic amenities and have enough of money to purchase more than basic necessities. Most developing economies, however, have a stark disparity between high wage and low wage sections of the society. This means that large sections of such economies are unable to engage in product consumption beyond basic needs.

Basically:

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Types of Economics and Basic Economic Problems: Conclusion

Visit the Oliveboard site to get notes on various topics for the JAIIB examinations. We expect that this study material will help you prepare well for the banking examination.

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