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Types of Economics and

Basic Problems - JAIIB

IE&IFS - Module A

As per latest syllabus

Exclusive Notes By
Siva Rama Prasad Sir
EX-GM, SBI PO
36+ Years of Experience

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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 problems faced in an economy?

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-

a. Demand
b. Supply
c. 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 prioritised. 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:
a. Labour
b. Capital
c. Technology
d. 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 found in 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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Learn From India’s Top Faculty

Siva Rama Prasad Sir Himanshu Sharma Sir Shubhi Ma’am Rajeev Mishra
EX-GM, SBI PO JAIIB & CAIIB Expert JAIIB & CAIIB Expert JAIIB & CAIIB Expert
Experience: 36+ Year 9+ Years of 4+ Years of 13+ Years of
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