Economics is a science of human behavior concerned with the allocation of scarce means in
such a manner that consumer can maximize their satisfaction,
producer can maximize their
profits and the society can maximize its social welfare.Economics
deals with the process of utilizing resources in almost efficient manner to
produce and allocate goods and services in the society so as to satisfy human
wants.Wants and scarcity/ scarcity of resources and the problem of choice.Human
wants refer to all goods, services and conditions of life that individual’s
desire. Human wants are always seemed greater than the goods and services
available to satisfy them. Economic resources are inputs, the factors, or the
means of producing the goods and services we want.Resources are scarce in
relation to their wants. Scarcity is a situation when demand for a good exceeds
its supply even at a zero price.As resources are limited, the amount goods and
services that any society can produce is also limited. Thus, the society must
choose which commodities to produce and which to sacrifice. Choice emerges when
limited resources are to be used for the satisfaction of unlimited wants. Choosing
on alternative and sacrificing others is a problem of choice. Thus, scarcity
causes ‘choice’. Choice implies decision making and decision making relates to usage
of limited resources in a manner that consumer maximizes his satisfaction,
producer minimizes his profit, and a nation maximizes its social welfare.Economics
is a social science that studies human behavior.
The problem of choice or the problem of allocation of scarce
resources to their
alternative uses.
For achieving the
objectives of
-Maximization of satisfaction for the consumer
-Maximization of profit for the producer
-Maximization of welfare for the relations
Definition of microeconomics
Microeconomics studies the economic behavior of individual
decision-making units such as
individual consumer, resource owners and business firms.
Microeconomics focuses attention on two broad categories of
economic units: household and
business firms and product and factor market.
Major component of microeconomics.
Theory of demand and consumer behavior
(How a consumer allocate his income to purchase of different
goods and services so that
he/she can maximize his satisfaction)
Theory of supply and producer behavior (how a producer
allocate his resources so that
he/she can maximize his/her profits)
Theory of price determination, explaining how an
individual firm determined output and
prices indifferent market.
Microeconomics is also called price theory as it studies how
prices of goods and
factors of production are determined.
MacroeconomicsMacroeconomics is concerned with the economy
as whole. It studies the aggregates like
aggregate production, employment level and price level.
Major features
It is aggregate economics.
It is also called income theory as it studies national
income.
Its objectives are to determine aggregates like aggregate
output, employment and price
level etc.
Scope of economics: Micro and Macro economics
Microeconomics mainly covers the following,
a. Consumer Behaviour- this explains how a rational consumer
spends his limited income
to attain maximum satisfaction
b. Producer’s Behaviour- this explains how a rational
producers allocate his limited
resources to attain maximum profit
c. Product pricing- this explain how prices of goods and
services are determined by the
firm/ industry.
d. Factor pricing- microeconomics concerned with the price
determination aspect of factor
of production such as land, labor, capital and organization.
e. Markets- microeconomics study nature of different types
of market and concerned with
how price and output is determined by a firm so that they
can maximize profit.
Macroeconomics mainly covers,
a. National income and output – macroeconomics study
different concepts and problems
associated with measurement of national income and output
b. General price level – macroeconomics is concerned with
how is the aggregate price
level in the economy. Is it stable? Or what measures are to
be taken to maintain price
stability?
c. Saving and investment- aggregate savings and investment,
factors determining savings
abd investment are studied in macroeconomics
d. Employment and economic growth
Economic problems associated with this subject are
considered and measures to
increase the level of employment and growth are analyzed in
macroeconomic
Major difference
a. Micro economics is the study of a particular component of
the economy e.g. firm,
households, industry etc. Macroeconomics is the study of the
economy in totalityb. The objective of micro economy is the analysis of
maximization is the analysis of
maximization of utility, profit, supply etc whereas
objective of macroeconomics is
full employment, growth, BOP equilibrium
c. Market mechanism plays significant role in the context of
microeconomic problems
whereas government plays a significant role in the context
of macroeconomic
problems
d. Microeconomics studies the equilibrium at a particular
point of time (static analysis)
whereas macroeconomics is based on time, rate of change,
past and expected value
of variables (dynamic analysis)
e. Microeconomics studies individual equilibrium process by
using partial equilibrium
analysis (other things remaining the same) whereas
macroeconomics uses general
equilibrium analysis as a whole for example
f. Microeconomic is also called price theory whereas
macroeconomic is also called
theory of income
Interdependence of
micro and macro economics
Micro and macroeconomics are interdependent on each other.
The analysis of economy
as whole (macroeconomics) is not possible without the
analysis of the individual units
(microeconomics). On the other hand, a firm can make
important decisions only after
considering the macroeconomic policy framework of the
government. So, both
approaches are to be suitably integrated in order to
prescribe policy measures to solve
economic problems.
Many macroeconomic theories are derived from microeconomic
behavior for e.g. the
psychological law of consumption in macroeconomics is based
on the theory of
consumer’s behavior in microeconomics. Similarly, there are
macroeconomic theories
influencing the decisions of individual firms. For e.g. a
firm is not allowed to determine
the wage rate of its corner not less than the rate specified
in the labor act- productivity
of individual units depends upon the suitable macroeconomic
policies of the
government whereas National output of country depends on the
productivity of
individual units.
Therefore, both the approaches deal with different subjects
but are interdependent.
Role government/ how government involved in economy?
Government is an important agent of economic system
government affects the circular
flow of economic activity by purchasing goods and services
for public consumption.
Governments may themselves produce some goods and
services More importantly, governments redistribute income through taxes and
subsidies. For
example, government levied taxes to discourage the
consumption of certain
commodities such as alcohol and provide incentives for the
consumption of others such
as education.
Importance of
microeconomics
This approach of economics helps us study and understand
the practical working of the
economy and microeconomics facilitates easy comprehension of
the economic system.
It provides the required tools that enable the formulation
of various economic policies. It also
provides techniques that facilitate the easy formulation of
economic strategies and economic
regulations.
Microeconomics explains the functioning of a free market
economy. It tells how major
economic stakeholder like consumer, producers takes decision
about allocation of resources
and to achieve goal
Microeconomics is of great help when it comes to studying
the conditions of economic
welfare. With the help of this branch of economics, we now
understand the standard of living
and the condition for welfare of the people. We can not only
study their condition of welfare
but we can also analyses the factors that determine their
welfare as well.
This branch of economics helps us understand the level of
satisfaction of the people in the
economy.
It also helps economists identify the allocation of
resources within the economy. Not only is it
useful in efficiently allocating the scarce resources to
productive uses but it also helps control
the use of the allocated resources as well.
Economic theories can be easily drafted and formulated
with the help of this branch of
economics.
Microeconomics ensures to understand the implications and
problems of taxations and
formulate suitable taxation policies.
Important of Macroeconomics
It helps to understand the functioning of a complicated
modern economic system. It describes
how the economy as a whole functions and how the level of
national income and employment
is determined on the basis of aggregate demand and aggregate
supply.
It helps to achieve the goal of economic growth, higher
level of GDP and higher level of
employment. It analyses the forces which determine economic
growth of a country and
explains how to reach the highest state of economic growth
and sustain it. It helps to bring stability in price level and analyses
fluctuations in business activities. It
suggests policy measures to control Inflation and deflation.
Macroeconomics helps us to review the overall performance
of the economy in different
spheres
Macroeconomics helps us to study the dynamic aspect of the
economy. It explains the
changes in national income, employment, aggregate supply,
aggregate demand etc. All these
variables are dynamic since they change from time to time.
Consumption
Consumption is the value of goods and services bought by
people. Consumption represents amount of
consumer expenditure made at a given level of income.
Consumption may be divided according to the durability of
the purchased objects. A broad classification
separates durable goods (as cars and television sets) from
non-durable goods (as food)
and from services (as restaurant expenditure).
Determinants
a. Current income level is the most determinant of
consumption. Income comes from labour
(employment and wages), capital (e.g. profit leading to
dividends, rents, etc.),remittance from
abroad. Income from consumer's cumulative wealth (including
dividends and interests on
wealth) provides an additional flow to available income.
b. Cumulated savings in the past can be give rise to a jump
in consumption. Family debt can be
boosted to fund consumption, while repayments lower
consumption.
c. Expectations on future income may also play an important
role.
Impact on other variables
a. A GDP component as it is, consumption has an immediate
impact on it. An increase of
consumption raises GDP by the same amount, other things
equal. Moreover, since current
income (GDP) is an important determinant of consumption, the
increase of income will be
followed by a further rise in consumption.
b. If goods and services are produced abroad, an increase of
consumption will immediately push
up imports
c. Since usually the States separately tax consumption (say
with a VAT tax), an increase of
consumption will also boost this type of state revenue, as
well as import duties revenue in the
case of imported goods. The growth mechanism of
consumption-income will also provide State
revenue through income taxes.
d. To the extent firms decide to invest by forecasting
future demand and by comparing it with
present production capacity, an increase of consumption may
induce new investment.
Propensity to consume Propensity to consume is a schedule of
consumer expenditure at various income levels.it represents
functional relationship between two aggregates, consumption
and total income. It shows how
consumption expenditure varies with changes in income.
C=f(Y)
Saving
All income which is not consumed is saving. Thus the saving
is defined as the excess of income over
consumption expenditure. Saving also involves reducing
expenditures.
S=Y-C
Individual saving, corporate saving and compulsory saving
which occur when government reduces
consumption by increasing tax are the different types of
tax.
Total saving= personal saving +business + government saving
Determinants
a. A tri-lateral relationship among savings, consumption,
and income is the key determinant of the
amount of personal savings. On the first side, given a
certain income, the decision to buy goods
and services (=consumption) negatively affects savings.
b. Savings can be actively planned in binding agreements,
like many pension schemes,
c. By contrast, savings can be also the outcome of negative
expectations about future income (as
when one is afraid of being dismissed)
d. A higher interest rate will give a greater return on
saving as banks offer more favorable rates.
e. Poor expectation for future economic growth, increase
households' savings as a precaution for a
future.
Impact on other variables
a. Cumulated and invested personal savings give rise to
personal wealth stock.
b. Savings left in bank accounts are an important part of
money. An increase of personal savings
could foster investment by the established firms.
c. Invested in Treasury bonds, savings finance public
expenditure. Invested in shares, they can
directly or indirectly finance the firms.
Major features of monetary policy 2019/20
The monetary policy will facilitate the achievement of the
growth target of
government of Nepal of around 8.5 percent by channeling
resource
towards employment promotion and entrepreneurial
development. Priority has been given to financial inclusion and financial
literacy and the
use of technology to ensure easy access of all citizens to
financial services.
Monetary policy has focused on maintaining monetary
aggregates at the
desired level which may exert from high expenditure from all
government
body, higher petroleum prices.
monetary management has consider the probable impact of
trade deficit
on external sector stability
Monetary policy will focus on interest rate stability
through effective
liquidity management.
An increase in public and private investment is likely to
boost up aggregate
demand. Monetary policy will focus on maintaining monetary
aggregates at
the desired level so as to avert the inflationary pressure
originating from
the demand side.
Instruments and operating targets
• Open market operations (OMOs) will be conducted by
monitoring the
excess liquidity of the BFIs and using interbank rate of the
BFIs as the
operating target of the policy
• Cash Reserve Ratio (CRR) for commercial bank, development
bank and
finance company will be maintained at 4% for Commercial
Bank,
development bank and finance.
• Monetary Policy has targeted to limit inflation rate
within 6%.
• Statutory Liquidity Ratio (SLR) for commercial bank,
development bank and
finance company should be maintained at 10%, 8% and 7%
respectively.
• Maintain foreign exchange reserves sufficient to cover the
prospective
imports of goods and services for at least 7 months in
2019/20.
• Interest rate corridor (IRC), introduced to minimize the
volatility of short
term interest rate, will be made further effective
• The bank rate, applied for the purpose of the lender of
the last resort
(LOLR) facility, will be reduced to 6 percent from 6.5
percent.• The special refinance rate has been kept unchanged at 1 percent,
while the
general refinance rate will be reduced to 3 percent from the
existing rate of
4 percent.
Credit management
• Domestic credit and private sector credit growth rates are
24 percent and
21 percent respectively
• The existing policy provision for the commercial banks to
extend at least 10
percent of their total credit in agriculture sector and at
least 15 percent in
energy and tourism sector has been kept unchanged.
• The minimum investment limit for selection of projects by
Infrastructure
Development Bank will be set at Rs.300 million.
• The policy provision requiring the BFIs to extend at least
5 percent of their
total credit to the deprived sector has been kept unchanged.
• In line with the provision made in the Financial Sector
Development
Strategy (FSDS) to bring the spread between the average
lending and
deposit rates below 4.4 percent by 2020/21, a provision will
be made to
bring down such spread to 4.4 percent by mid-July 2020.
• Necessary coordination will be made to sell foreign
employment bond and
citizen saving bond throughout the year in order to mobilize
remittance
income in national priority sectors and encourage the use of
formal
channels for remittance inflow.
Monetary Management and other policies
• Growth of broad money (M2) set at 18 percent.
• Commercial banks required issuing debentures of at least
25 percent of
their paid-up capital by mid-July 2020.
• No need to take approval from NRB to open branchless
banking centers in
those wards where there is no bank branch.
• Each commercial bank has to open Regional Head Office in
all provinces.
• Merger and acquisition is highly encouraged to stop
unhealthy competition
between commercial banks and to further strengthen financial
sector
stability.• Incentives for merger and acquisition provided
• Policy of gradually reducing cash transactions.
• Provision to be made to regulate and supervise the
licensed institutions
involved in foreign currency transactions.
• Necessary provision to be made to regulate overseas
foreign exchange
expenses on studies and group travels.
• In view of the Visit Nepal Year 2020, arrangements will be
made for the BFIs
to open separate foreign currency exchange counter
facilities at major
tourist destinations
• Necessary coordination will be made to sell foreign
employment bond and
citizen saving bond throughout the year in order to mobilize
remittance
income in national priority sectors and encourage the use of
formal
channels for remittance inflow
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