Economics Concepts | SauravWorld

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Basic Concepts of Economics

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Economics: The study of how scarce resources are allocated among alternative uses to satisfy human wants and needs.

Scarcity

Resources are limited while human wants are generally unlimited.

Choice

Scarcity forces individuals and societies to make choices.

Opportunity Cost

The value of the next best alternative sacrificed.

Utility

The satisfaction obtained from consuming a good or service.

Factors of Production

Factor	Meaning	Reward
Land	Natural resources	Rent
Labour	Human effort	Wages
Capital	Produced means of production	Interest
Entrepreneur	Organises factors and takes risk	Profit

Microeconomics vs Macroeconomics

Microeconomics

Studies individual consumers, firms, markets, prices and resource allocation.

Macroeconomics

Studies the economy as a whole: GDP, inflation, unemployment, growth and national income.

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Demand

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Demand means the quantity of a good or service that consumers are willing and able to purchase at different prices during a given period.

Law of Demand

Other things remaining constant, quantity demanded generally
falls when price rises and rises when price falls.

Price ↑ → Quantity Demanded ↓

Price ↓ → Quantity Demanded ↑

Determinants of Demand

Price of the good
Consumer income
Prices of related goods
Tastes and preferences
Population
Expectations about future prices
Advertising
Seasonal factors

Elasticity of Demand

Price Elasticity = % Change in Quantity Demanded / % Change in Price

Elastic Demand

Quantity changes significantly in response to price.

Inelastic Demand

Quantity changes relatively little in response to price.

Unitary Elastic

Percentage change in quantity equals percentage change in price.

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Supply

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Supply is the quantity of a good or service that producers are willing and able to sell at different prices.

Law of Supply

Price ↑ → Quantity Supplied ↑

Price ↓ → Quantity Supplied ↓

Determinants of Supply

Price of the product
Input costs
Technology
Taxes and subsidies
Number of sellers
Producer expectations
Natural conditions
Government regulations

Market Equilibrium

Equilibrium occurs when quantity demanded equals quantity supplied.

Qd = Qs

Price Above Equilibrium

Usually creates a surplus.

Price Below Equilibrium

Usually creates a shortage.

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Value of Money

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The purchasing power of money describes how many goods and services a unit of money can buy.

Purchasing Power

Purchasing Power ∝ 1 / Price Level

When the general price level increases, the purchasing power of money generally decreases.

Inflation

A sustained increase in the general price level of goods and services over time.

Deflation

A sustained decrease in the general price level.

Disinflation

A reduction in the rate of inflation, without necessarily creating falling prices.

Time Value of Money

FV = PV(1+r)ⁿ

PV = FV/(1+r)ⁿ

Where PV = present value, FV = future value, r = interest rate and n = number of periods.

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GDP, GNP, GNI & National Income

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GDP

Gross Domestic Product (GDP) is the market value of final goods and services produced within a country's territorial boundaries during a specified period.

Expenditure Approach

GDP = C + I + G + (X-M)

C = Consumption
I = Investment
G = Government expenditure
X = Exports
M = Imports

Nominal vs Real GDP

Nominal GDP

Measured using current prices.

Real GDP

Adjusted to remove the effect of price changes.

GDP Per Capita

GDP per capita = GDP / Population

Other National Income Measures

Term	Meaning
GDP	Domestic production
GNP	GDP + net factor income from abroad
GNI	Income earned by residents/nationals, including relevant foreign income
NDP	GDP − depreciation
NNP	GNP − depreciation

GDP Growth Rate

Growth Rate = [(Current GDP - Previous GDP) / Previous GDP] × 100

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Inflation & Price Indices

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Consumer Price Index

CPI tracks changes in the prices paid by consumers for a representative basket of goods and services.

Producer / Wholesale Prices

Producer or wholesale price measures track prices at earlier stages of the production/distribution chain.

Inflation Rate

Inflation Rate = [(Current Price Index - Previous Price Index) / Previous Price Index] × 100

Types of Inflation

Demand-Pull

Demand grows faster than productive capacity.

Cost-Push

Production costs increase and push prices upward.

Built-in Inflation

Wage and price expectations reinforce each other.

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Employment & Unemployment

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Unemployment Rate

Unemployment Rate = Unemployed Persons / Labour Force × 100

Types

Frictional unemployment
Structural unemployment
Cyclical unemployment
Seasonal unemployment
Disguised unemployment
Underemployment

Labour force generally consists of employed people plus
unemployed people who are actively seeking and available for work,
subject to the statistical definition being used.

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Business Cycle

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Expansion

Economic activity increases.

Peak

High point before a slowdown.

Contraction

Economic activity declines.

Trough

Low point before recovery.

Expansion → Peak → Contraction → Trough → Recovery

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Fiscal Policy & Government Budget

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Fiscal policy concerns government decisions regarding taxation, public expenditure and borrowing.

Government Revenue

Income taxes
Corporate taxes
Indirect taxes
Fees
Dividends and other non-tax receipts
Borrowing is financing, not ordinary revenue

Government Expenditure

Infrastructure
Education
Healthcare
Defence
Welfare programmes
Interest payments

Fiscal Deficit

Fiscal Deficit = Total Expenditure - Total Receipts excluding borrowings

Primary Deficit

Primary Deficit = Fiscal Deficit - Interest Payments

Revenue Deficit

Revenue Deficit = Revenue Expenditure - Revenue Receipts

Public Debt

Government debt represents accumulated borrowing obligations.

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Monetary Policy & Central Banking

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Monetary policy involves managing interest rates, liquidity and monetary conditions to influence inflation and economic activity.

Major Central-Bank Tools

Tool	Basic Meaning
Policy Interest Rate	Key rate influencing borrowing and financial conditions
Reserve Requirement	Required reserve holdings of banks, where applicable
Open Market Operations	Buying or selling securities to influence liquidity
Standing Facilities	Facilities through which eligible institutions can borrow/deposit funds with the central bank

General Transmission

Policy Rate ↑ → Borrowing Cost ↑ → Demand tends to ↓

Policy Rate ↓ → Borrowing Cost ↓ → Demand tends to ↑

The exact instruments and operating framework differ between central banks and can change over time.

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Core Concepts of Banking

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What is a Bank?

A bank is a financial institution that accepts deposits, provides credit and offers payment and other financial services.

Types of Deposits

Savings Account

Designed primarily for saving and routine transactions.

Current Account

Commonly used for frequent business transactions.

Fixed / Term Deposit

Money deposited for a specified period, usually at an agreed rate.

Recurring Deposit

Regular deposits made over a predetermined period.

Loans

Home loan
Education loan
Vehicle loan
Personal loan
Business loan
Working-capital finance

Interest

Simple Interest = P × R × T / 100

Amount = Principal + Simple Interest

Compound Amount = P(1+r)ⁿ

Loan EMI Concept

EMI = P × r × (1+r)ⁿ / [(1+r)ⁿ - 1]

P = principal, r = periodic interest rate, n = number of instalments.

Banking Risk Concepts

Credit Risk

Risk that a borrower fails to meet obligations.

Liquidity Risk

Risk of not having sufficient liquid funds when needed.

Market Risk

Risk from movements in market variables.

NPA

A loan asset classified as non-performing under applicable regulatory rules.

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Money, Credit & Money Creation

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Functions of Money

Medium of exchange
Unit of account
Store of value
Standard of deferred payment

Money Supply

Money-supply measures vary by country and may include currency and different categories of deposits.

Credit Creation

Commercial banks can expand deposits through lending within
the banking system, subject to reserve, capital, liquidity,
regulatory and demand constraints.

Simple Deposit Multiplier ≈ 1 / Reserve Ratio

The simple multiplier is an educational model, not a complete description of modern money creation.

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Core Concepts of Accounting

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Accounting is the systematic recording, classification, summarisation and reporting of financial transactions.

Accounting Equation

Assets = Liabilities + Equity

Major Elements

Assets

Resources controlled by an entity that have economic value.

Liabilities

Obligations owed to external parties.

Equity

Residual interest after liabilities are deducted from assets.

Revenue

Income generated from ordinary activities and other recognised sources.

Expense

Costs incurred in generating revenue or operating the entity.

Profit

Revenue minus recognised expenses.

Debit & Credit

Account Type	Increase Generally	Decrease Generally
Asset	Debit	Credit
Expense	Debit	Credit
Liability	Credit	Debit
Equity	Credit	Debit
Revenue	Credit	Debit

Accounting Cycle

Transaction → Journal → Ledger → Trial Balance → Adjustments → Financial Statements

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Financial Statements

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Income Statement

Shows revenues, expenses and profit or loss over a period.

Profit = Revenue - Expenses

Balance Sheet

Shows assets, liabilities and equity at a particular date.

Assets = Liabilities + Equity

Cash Flow Statement

Shows cash inflows and outflows from operating, investing and financing activities.

Major Accounting Ratios

Current Ratio = Current Assets / Current Liabilities

Debt-to-Equity = Total Debt / Equity

Gross Profit Margin = Gross Profit / Revenue × 100

Net Profit Margin = Net Profit / Revenue × 100

ROE = Net Income / Average Equity × 100

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Financial Markets & Investment

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Money Market

Short-term borrowing and lending instruments.

Capital Market

Long-term financing through equity and debt markets.

Stock

Represents ownership interest in a company.

Bond

A debt instrument under which the issuer owes obligations to investors.

Mutual Fund

Pools investor money into a professionally managed portfolio.

Index

A statistical measure tracking a selected basket of securities.

Return Concepts

Return = (Ending Value - Beginning Value + Income) / Beginning Value × 100

Risk vs Return

Investments differ in expected return, uncertainty, liquidity,
time horizon and risk. Higher expected return does not guarantee
higher actual return.

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International Trade & Balance of Payments

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Exports

Goods and services sold to foreign countries.

Imports

Goods and services purchased from foreign countries.

Balance of Trade

Balance of Trade = Exports of Goods - Imports of Goods

Trade Surplus

Exports > Imports

Trade Deficit

Imports > Exports

Balance of Payments

The balance of payments records economic transactions between residents of a country and the rest of the world over a period.

Current Account

Broadly includes trade in goods and services, primary income and secondary income.

Capital / Financial Flows

Record relevant investment and financial transactions with the rest of the world according to the accounting framework used.

Exchange Rate

Exchange Rate = Price of one currency expressed in another currency

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Foreign Exchange & Reserves

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Foreign Exchange

Foreign currency and foreign-currency-denominated financial assets used for international payments and investment.

Appreciation

A currency becomes more valuable relative to another currency under the exchange-rate system being considered.

Depreciation

A currency becomes less valuable relative to another currency.

Foreign Exchange Reserves

Official external assets held by a country's monetary authorities, typically including reserve assets such as foreign currencies, gold and other qualifying assets.

Why Reserves Matter

Support external payments
Help manage external liquidity
Provide confidence during financial stress
May support exchange-rate management

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Productivity & Economic Growth

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Labour Productivity

Labour Productivity = Output / Labour Input

Economic Growth

An increase in real economic output over time.

Sources of Growth

Capital formation
Human capital
Technology
Productivity improvement
Infrastructure
Innovation
Efficient institutions

Per Capita Growth

Real GDP per Capita = Real GDP / Population

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Economic Development & Inequality

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Economic Growth vs Development

Growth

Primarily concerns increases in real economic output or income.

Development

Broader improvement in living standards, capabilities, health, education, opportunities and economic wellbeing.

Gini Coefficient

A measure of inequality in a distribution. Higher values generally indicate greater inequality, depending on the convention used.

Poverty

Poverty can be measured using monetary and multidimensional approaches.

Human Development

Human development considers dimensions such as health, education and standard of living.

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Major Parameters to Measure a Country's Economy

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No single indicator can fully describe an economy.
A country's economic condition is better understood by examining
a group of indicators together.

1. GDP

Size of economic output

2. Real GDP Growth

Rate of increase in real output

3. GDP Per Capita

Average output per person

4. Inflation

Change in general price level

5. Unemployment

Labour-market weakness

6. Labour Participation

Participation in the labour market

7. Productivity

Output generated per unit of input

8. Fiscal Deficit

Government financing requirement

9. Public Debt

Government debt burden

10. Current Account

External transactions with the world

11. Trade Balance

Goods exports minus imports

12. Foreign Exchange Reserves

External reserve assets

13. Exchange Rate

Currency value relative to another

14. Interest Rates

Cost of borrowing and return on lending

15. Money Supply

Measures of money and deposits

16. Credit Growth

Expansion or contraction of lending

17. Bank Health

Capital, asset quality and liquidity

18. Industrial Production

Output of industrial sectors

19. Manufacturing

Strength of manufacturing activity

20. Infrastructure

Physical productive capacity

21. Investment

Capital formation

22. Savings

Resources available for investment

23. Consumption

Household spending

24. Government Spending

Public-sector demand

25. Tax Revenue

Government revenue from taxation

26. Poverty Rate

Population below defined poverty threshold

27. Income Inequality

Distribution of income

28. HDI

Health, education and income dimensions

29. Demographics

Population, age structure and dependency

30. Human Capital

Education, skills and health

Economic Health Dashboard Concept

Area	Important Indicators
Production	GDP, industrial production, manufacturing
Prices	CPI, inflation, producer/wholesale prices
Employment	Unemployment, participation, wages
Government	Fiscal deficit, revenue, expenditure, debt
Banking	Credit growth, NPA, capital, liquidity
External Sector	Exports, imports, current account, reserves
Currency	Exchange rate, external liquidity
Living Standards	Per-capita income, poverty, HDI
Inequality	Gini coefficient, income distribution
Future Capacity	Investment, productivity, infrastructure, human capital

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Quick Economics Formula Reference

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GDP

C + I + G + (X-M)

GDP Per Capita

GDP / Population

GDP Growth

(Current-Previous)/Previous ×100

Inflation

(Current Index-Previous Index)/Previous Index ×100

Unemployment Rate

Unemployed/Labour Force ×100

Fiscal Deficit

Expenditure - Receipts excluding borrowings

Primary Deficit

Fiscal Deficit - Interest

Trade Balance

Exports - Imports

Simple Interest

P×R×T/100

Compound Amount

P(1+r)ⁿ

Accounting Equation

Assets = Liabilities + Equity

Profit

Revenue - Expenses

Current Ratio

Current Assets / Current Liabilities

Debt-to-Equity

Debt / Equity

Productivity

Output / Input

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Important Economic Terms

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Term	Meaning
Inflation	Sustained rise in general price level
Deflation	Sustained fall in general price level
Recession	Broad decline in economic activity
Depression	Exceptionally severe and prolonged economic downturn
Stagflation	High inflation combined with weak growth and labour-market conditions
Liquidity	Ease with which an asset can be converted into cash
Solvency	Ability to meet long-term obligations
Capital	Resources used in production or finance
Subsidy	Government support intended to reduce costs or encourage activity
Tax	Compulsory payment to government
Tariff	Tax imposed on imports
Quota	Quantity restriction on trade
Productivity	Output relative to input
Fiscal Policy	Government taxation and spending policy
Monetary Policy	Central-bank policy affecting monetary and financial conditions
Exchange Rate	Price of one currency in terms of another
Public Debt	Outstanding government borrowing
Current Account	Major category of external transactions including trade and income
Balance of Payments	Systematic record of external economic transactions
Per Capita Income	Income divided by population