The advantages and disadvantages of large

scale and small scale production

• Large/Mass production is the production of large amounts of
standardized products, including and especially on assembly
lines. With job production and batch production it is one of
the three main production methods.[1]
• The term mass production was popularized by a 1926 article
in the Encyclopedia Britannica supplement that was written
based on correspondence with Ford Motor Co. The New York
Times used the term in the title of an article that appeared
before publication of the Britannica article.[2]
• The concepts of mass production are applied to various kinds
of products, from fluids and particulates handled in bulk (such
as food, fuel, chemicals, and mined minerals) to discrete solid
parts (such as fasteners) to assemblies of such parts (such as
household appliances and automobiles)
Advantage of Large scale production:
1.Efficient use of capital equipment: There is large
scope for use of machinery, which results in lower costs.
A Large producer can install an up-to- date and
expensive machinery. He can also have own repairing
unit. Specialized in machinery can be employed for each
job. The result is that production is very economical.
Small producer with small markets can't keep the
machinery continuous working. Keeping it idle is
uneconomical. A large Producer can work it
continuously and reap resulting economies.
2.Using of specialized labor: Specialized labor produce a
large output and of better quality. It is only in a large
business organization that every person can be put on
the job that he can best perform. Better utilization of
special in management: The use of capable manager's
time in an enlarged scale production. His assistance and
specialized may be used in a large-scale production
where his ability is more fruitful.
3.Economies of buying and selling: While purchasing raw
material and other accessories, a big business can
secure especially favorable term an account of its large
custom. He can attract customer by offering a greater
variety and by ensuring prompt execution of the
orders, placed with it when he selling a product.
4.Economy in rent: A large-scale producer makes a saving
in rent too. If the same factory made to produce a large
Quantity of goods, the same amount of rent is divided
over a large output. This means a smaller addition to
the cost per unit in the form of rent.
5.Experiment and research: A large concern can afford to
spend liberally on research and experiments.
Successfully research may lead to the discovery of
cheaper process.
6.Advertisement and salesman ship: A big concern can
afford to spend large amount of money on
advertisement and salesmanship. Amount of money
spent on advertisement per unit comes to a low figure
when production is on large scale. Salesman can make
a careful study of individual markets and thus acquire a
hold on new market or strengthen it on old ones.
7.Utilization of by-products: A big producer will not
have to throw away any of it's by products or waste
products. It will be able to make an economical use
of them.
8.Meeting adversity: A big business can show better
resistance in times of adversity. It has much better
recourses. Losses can easily bear.
9.Cheap credit: A large business can secure credit
facilities at cheap rate. Its credit in the money
market is high and banks are only two willing to give
advance. Low cost of credit reduces cost of
production.
 Disadvantage of large-scale production:
1.Over-worked management: A large-scale producer
cannot pay off that you can think of full attention to
every detail. Costs often rise on account of the
employees or waste of material by them. This is due
to the lack of supervision. Owing to laxity of control
costs of production go up. The management is
overworked.
2.Individual tastes ignored: Large-scale production is
a mass production or standardized production.
Goods of uniform quality are turned out
irrespective of the preferences of individual
customers. Individual tastes are not therefore,
satisfied.
3.Personal element: Paid employees generally manage a
large-scale business. The owner is usually absent. The
sympathy and personal touch, which ought to exit
between the master and the men, are missing frequent
misunderstandings lead to strikes and lack outs. This is
positively harmful to the business.
4.Possibility of depression: large-scale production may
result overhead production. Production may exceed
demand and cause depression unemployment. It is not
always easy or profitable to dispose of a large output.
5.Dependence on foreign market: A large-scale producer
has generally to depend on foreign markets. The
foreign markets may be cut off by war or some other
political upheaval this makes the business risky.
6.Cut throat competition: Large-scale producers must
fight for the markets. These are wasteful competition,
which does not to society. Many promising businesses
are ruined by senses competition. There is also
competition and biddings for resorts and inputs.
7.International complications and war: When the large-
scale producer operates on an international scale, their
interest clash either on the score of markets or of
materials. These complications sometimes lead to
armed conflicts. Many a modem war a rose on account
of scramble for materials & markets.
8.Lack of adaptability: A large scale producing units find
it's very difficult to switch on from one business to
another, in a depression small firms are able to move
away from declining trades to flourishing ones easily. In
this way they are able to avoid losses. This adaptability
is lacking in a big business.
 Characteristics of Islamic Economy
The characteristics of Islamic economy can be
explained in various ways. The following as
representative characteristics of a truly functioning
Islamic economy or what ought to be in such an
economy.
1. Freedom of work and enterprise: Islam has
allowed freedom of work and enterprise. This is
evident from the Madinitic model of Islamic economy.
A reading of the chapter of any Hadith collection in
respect of agriculture, gardening, business etc. will
establish this. The Quran also clearly states that "Allah
has made business lawful for you (Sura Baqara, Ayat -
275)“
• Islam essentially allows economy to operate freely
according to the market forces subject to Islamic
restrictions and guidelines on production. distribution,
marketing, investment trade, exchange, wages etc.
• The state can also further interfere in this free economy
to restore equilibrium and establish justice and other
Islamic objectives .
• An entrepreneur can produce only permitted things.
• Profit should be normal in such an economy after giving
proper wages to the labourers in accordance with
Islamic principles.
• Some forms of trade practices, exchange, investment,
and land tenancy in agriculture are prohibited in Islam.
• It also disallows monopoly and hoarding as social evils.
• The aforesaid restrictions make “free economy “in
Islam qualitatively different from capitalism.
• Islam can not be said to be capitalistic only because it
allows forces of demand and supply to operate in the
economy.
• Forces of demand and supply are fundamental
economic forces, which were operational even before
capitalism.
2. A special concept of ownership:
• In Islam Allah is the true owner of all things. The Quran
says: "To Allah belongs whatever is in the earth". (Al-
Imran).
• However, Allah in His mercy allows human beings to
inherit wealth, own it and use it subject to His laws as
evident from the following verses:
 i) The land belongs to Allah. He allows it, to be inherited by
whom so ever he pleases. (Sura Araf, Ayat: 128).
ii) Do they not see that we have created for them ----- among
the things fashioned by us----- cattle of which they become
owners? (Sura Yasin, Ayat: 29).
• Islam, therefore, allows man as Vice-gerant, to inherit from
Allah (that is to own) wealth. This is indeed a trust for proper
use. We may call it Trust ownership.

3. Kinds of Ownership:
• In early Islam there were three kinds of ownership: private,
communal and state ownership.
• The books' of Hadith are full of accounts of individual
ownership. This was the standard ownership.
• Some important things like water, canals pastures
and graveyards were communal properties.
• The state owned the mines, rivers and large tracts
of land. After the conquest of Syria and Iraq, these
lands were made state lands and were not allowed
to go into private ownership.
4. State Ownership:
• There is no bar on state ownership of enterprise in
Islam. The basic economic institutions may be
brought under state control, if this is required to
establish social justice or protect the interests of
the community.
• Islam protects lawful property and is in favour of confiscation of
unlawful property. There are some instances of take over of
unlawful property during the period of Hazart Omar and Hazrat
Omar bin-Abdul Aziz.
• Lawful property can be taken over by the state only for valid social
reasons after due compensation. During the last Hajj the Prophet
(SM) announced the principle of protection of lawful property. The
Quran says, "don't eat each other's property wrongfully " (Sura
Nisa,Ayat- 29).
5. Prohibition of Interest:
• Islam prohibits interest. This requires a total reorganization of the
economy, banking, investment, exchange, business and
international trade.
• Already in the last 30 years hundreds of Islamic banks and financial
institutions have been set up and this has become an alternative
mode in most Muslim countries and some non- Muslim countries.
• Its viability and practicability has been accepted by economists
and bankers and many consider this system superior in some
respects. A body of literature has already come up on this subject.
6. Zakat:
• Islam has made Zakat compulsory on the wealth of rich
Muslims. This is spent for the weaker and distressed sections
of the society.
• Zakat not only distributes wealth between the rich and the
poor of the society, it also influences investment, savings and
allocation of income and resources.
7. Concern for Poor:
• This is a special feature of Islam. Zakat is one institution which
testifies to this. In this connection we may refer to ayat 5-6 of
Sura Qasas.
• We desired to show favour into those who were depressed in
the earth, and to make them leaders and to make them
inheritors and to establish them on earth .
• In these verses Allah, the Almighty has expressed His desire to
show favour on the depressed people. Islamic economy shall
establish all possible institutions to carry out this desire of the
Almighty.
8. Distribution of inheritance:
• Islam has not left the distribution of inheritance on the whims
of a person, In Islam a person can not favour one over the
other of his relations for temporary or subjective reasons as is
the rule in the West.
• Islam distributes inheritable property among several groups
of people:
i) Children
ii) Husband/ Wife
iii) Parents
iv) Brothers and sisters in certain situations.
• This distribution has taken care of different groups keeping in
view their social role, requirements and proximity of kinship
relationships.
• For those who remain outside the list of inheritors. Islam has
provided for wasiat (will) for all such relations if they are in a
distressed condition.
• A person can will upto one 3rd of his/her property for
distressed relations or others outside the inheritors.
Define Islamic Economics . What are the Goals,
Objectives and Features of Islamic Economic System
Islamic Economics :
• Islamic economics is defined as the systematic study of
the problem of allocation of resources, production of
goods and services and distribution of output, income
and wealth in an economy in the light of the Qur'an
and the Sunnah .
• Islam has a set of special moral norms and values about
individual and social economic behavior. Therefore, it
has its own economic system, which is based on its
philosophical views and is compatible with the Islamic
organization of other aspects of human behavior: social
and political systems
 Definition of Islamic Economics by the experts :
• Mannan (1984)- “Complete social science which
deals with economic, social and moral values of
human being”.
• Khurshid (1992)- “Islamic economics is the
economic problems in Islamic point of view and the
practical and methodical effort of understanding
those Islamic economic problems in humanitarian
ground”.
• Hamid (2002)- “Islamic economics is that part of
Islami regulations which deals with economic, social
and moral behaviour of human being in case of
production distribution and consumption of goods
and services”.
• Omar Chapra- “Islamic Economics is that branch
of knowledge which helps realise human well-
being through an allocation and distribution of
scarce resource that is in conformity with Islamic
teachings without unduly curbing individual
freedom or creating continued macro-economic
and ecological imbalances”.
Sources of Islamic Economics
• 1-) Quran, such a divine sources
2-) Sunnah, the sayings and practices of the
Prophet Mohammed (pbuh)
3-) Ijma, the common belief of Muslim scholars
4-) Qiyas, the other principles that are compared
to those three sources.
 The goals of an Islamic economy are as under :
a. Establishment of Adl (justice), to attain Hasanah
(good) and Falah (welfare) in this life and the life
hereafter.
b. To establish Ihsan (gracious conduct or kindness) in
economic affairs.
c. Establishment of Maroof (proper or good acts,
institutions) in economic life.
d. Elimination of Munker (evil, wrong or injurious
practices) form economic life.
e. Freeing humanity from unwanted burdens
and shackles and to make life easier for them.
f. Achieve maximum economic growth.
g. Maximize employment to ensure maximum
distribution of wealth in society.
h. Achieve universal education
i. Encourage co-operation in society
j. Favoring weaker sections to establish them
in life.
 Objectives of Islamic Economics
• Achievement of Falah :
• The first and the foremost aim and objective of Islam is
falah or well-being of the mankind in this world and in
the next world. That is why al-Qur’an, the revealed
book of Islam, admires those who pray to God :
• “Our Lord ! Give unto us in the world that which is
good and in the Hereafter that which is good, and
guard us from the doom of fire……” (2 : 201)
• Fair and Equitable Distribution :
• The second most important objective of the economic
system of Islam is to make distribution of economic
resources, wealth and income fair and equitable.
• Islam discourages concentration of wealth in
few hands and ensures its circulation among
all the sections of society. Al-Qur’an, the
revealed book of Islam, says:
• “That which Allah give as spoil unto His
messenger from the people of the townships,
it is for Allah and His messenger and for the
near of kin and the orphans and the needy
and the wayfarer, that it become not a
commodity between the rich among you.” (Al-
Hashr 59:7)
• Provision of Basic Human Needs :
• It is also an important purpose and objective of the
Islamic economic system that basic necessities of
life like food, clothing and shelter should be
provided to all the citizens of the Islamic state.
• The Prophet of Islam has beautifully defined the
barest necessities of life in his famous Hadith which
says:
• “The son of Adam has no better right than that he
would have a house wherein he may live, and a
piece of cloth whereby he may hide his nakedness,
and a piece of bread and some water.” (Tirmizi).
• Establishment of Social Justice :
• One of the major objectives of the Islamic economic
system is to establish socio-economic justice among
all the members of the nation.
• Allah has placed in the earth sustenance and
provisions for all to cater their needs.
• However, on account of various reasons, the
distribution of these provisions does not remain fair
among all the human beings, thus making some
lucky ones very rich who possess wealth more than
their needs and making many others very poor who
possess nothing or too little to meet their very basic
necessities of life.
• Islam meets this challenge of disproportionate
division of wealth by making it obligatory on
the rich to surrender a part of their wealth for
helping the poor and unfortunate members of
the community.
• Promotion of Brotherhood and Unity :
• Another objective of the Islamic economic
system is to establish brotherhood and unity
among the Muslims .
• The Holy Quran says: “It is not righteousness that ye
turn your faces to the East and the West; but righteous
is he who believeth in Allah and the Last Day and the
Angels and the Scripture and the Prophets;
• And give his wealth, for love of Him, to kinsfolk and to
orphans and the needy and the wayfarer and to those
who ask, and to set slaves free; and observe proper
worship and pay Zakat” (2 : 177).
Achievement of Moral and Material Development : The
economic system of Islam aims at material as well as
moral development of the Muslim community. It
achieves this objective through its system of taxation
and fiscal management particularly through Zakat.
• Circulation of Wealth : Another important objective
of economic system of Islam is to discourage
hoarding and ensure the constant circulation of
wealth
• Elimination of Exploitation : The last, but the most
important, objective of Islamic economic system is
elimination of exploitation of one human by
another. To achieve this end Islam has taken many
effective measures. First such measure is the
abolition of interest or usury which is and has been
perhaps the worst instrument of human
exploitation.
Islamic Economic System with its features and
comparison
• Capitalism, Communism and Mixed Economics system
has purely a materialistic approach in which human
social life has no importance. But in Islamic System, the
followers of Islam are required to lead a material life in
such way that it becomes a source of happiness and
respect of others in this world for making secure
himself for next world.
• Islamic Economic System consist of institutions,
organizations and the social values by which natural,
human and man made resources are used to produce,
exchange, distribute and consume wealth? Goods and
services under the guiding principles of Islam to
achieve "FALAH" in this world and also other it.
• Salient Features of Islamic Economic System
 Main characteristics of Economic System of Islam
are.
1. The Concept of Private Property
2. Consumption of wealth
3. Production of wealth
4. Distribution of wealth
5. The concept of Zakat
6. Interest free Economy
7. Economic Growth
8. Responsibilities of the Government.
1. The Concept of Private Property
• Basic Principles in Islam for Consumption or Investment
of private property are:
• Concept of "HALAL" and "HARAM" for earning or in
production and consumption of wealth.
• A property cannot be used against public interest.
• Show much as you have something.
• Real/money Capital cannot be used for gain.
• Payment of Zakat is compulsory.
2. Consumption of Wealth
• In Islamic System uses of luxuries are not allowed
because it against the concept of "TAQWA" should have
distinguish between "HALAL" and "HARAM"."BUKHAL"
and "ISRAF" are to be avoided.
3. Production of Wealth
• Price mechanism plays a key role in carrying out the production
process in an Islamic Society. As Price system results in the
expectations of workers and consumers the Govt. Interferences
with the price mechanism to over come the problem. These things
are not allowed in Islamic System.
• Production of drugs, gambling, lotery, music, dance etc.
• Lending and borrowing on interest
• Black marketing, Smuggling etc.
4. Distribution of Wealth
• Islamic Economics System favour fair (not equal) distribution of
wealth in the sense that it should not be confined to any particular
section of the society. For fair distribution of wealth Islam gives
following steps
• "BUKHAL" and "ISRAF" are to be avoided.
• Payment of Zakat
• Interest not allowed
• Monopoly of Private firm not allowed
• Earning from Black Market.
5. The Concept of Zakat
• Zakat is a major source of revenue the government in an Islamic
state. It levy on all goods and money or on wealth if have to pay
yearly on the month of RAJAB or RAMADAN.
6. Interest free Economy
• The whole financial system the bank structure in particular is run
on the basis "SHARAKAT" and "MUZARABAT" in Islamic state.
Therefore, Islamic economics is an interest free economy.
7. Responsibility of the Government
• Should check un-Islamic activity like gambling, smuggling, black
marketing etc.
• Should secure poor people by giving them necessity of life i.e.
food, clothing, health etc.
• Should provide equal employment opportunity.
• Social and Economic Security is required to guaranteed by the
Govt.
Conclusion
• An Islamic Setup provides a graceful economic and social life. it
distribute the wealth in all family.
 Comparison of Islamic Economic System with other Economic
System
• Islamic Economic System possesses the character of both
capitalism and socialism and it is free from their evils. Following
are the comparison of Islamic state with others.
1. Distinguishing Characteristics
• Capitalist says "Economic Freedom" to producers and Consumers.
• Communism says Economic Equality achieved through state
ownership of the means of production.
• The distinguish characteristics of an Islamic System is "Economic
and Social Justice" so that every body gets his / her due.
2. The Concept of Private Property
• In a Capitalist system unlimited liberty and right of ownership for
private property is given which has resulted in the capitalist
exploitation of workers. Islam allows the right of private ownership
and freedom of enterprise in limited capitalism but not leave the
property for the long period.
3. Consumption of Wealth
• In Capitalism any thing can be consumed while a
communist society only consumer goods and services
which are allowed to be produced in the country. In
Islamic Country only "HALAL" are allowed to be
produced and consumed "HARAM" goods and services
are not allowed to be produced and consumed.
4. Production of Wealth
• Capitalism motive is only profit they produced goods
for only profit. In communist society central plan
authority made decision what to produce and how
much to produce. But in Islamic System only have to
produce "HALAL" goods and "HARAM" goods like
alcohol drink, drug etc are not allowed.
5. Distribution of Wealth
• In Capitalism concentration of wealth is goes on few hand due
to unlimited right of ownership and free competition. In
communism system dicta for ship is created due to concept of
private property. In Islamic System, Due to "ZAKAT" and
"SADQAT" automatically wealth transfer to poor from rich.
6. The Role of Interest
• The interest made brings equal between saving and
investment to promote, capital formation in a capitalist
society. In communism, interest does not pay any role for
saving and investment. In the Islamic system interest based
economic activities are strictly banned. Hence interest is not a
source of capital formation in an Islamic.
Conclusion
• We conclude that Capitalist and communist are materialistic
in nature and they only looking for to satisfy the material
wants of the people. But Islamic economic system provides a
fine blend of materialism and spiritualism.
 Definitions of Economics .
Economics is a social science concerned with the
production, distribution, and consumption of goods
and services. It studies how individuals, businesses,
governments, and nations make choices about how to
allocate resources.
“An inquiry into the nature and causes of
the wealth of nations," Adam Smith
Adam Smith (1723-1790) was a Scottish
philosopher and economist who defined
Economics- As a science of wealth.
• According to Adam Smith, economics enquires
into the factors that determine wealth of the
country and its growth.
• That the emphasis of Adam Smith is on the
wealth and riches of a nation are clear from
the following quotation from his book.
• “The great object of Political Economy of
every country is to increase the riches and
power of that country.”
• As the wealth and riches of a country cannot
grow without the proper utilization of its
resources and this is what forms the subject
matter of his book “The Wealth of Nations”.
• Thus, Adam Smith emphasized the production
and expansion of wealth as the subject matter
of economics
• In his book, he discussed the word ‘wealth’ through
its four aspects:
I. Production of wealth
II. Exchange of wealth
III. Distribution of wealth and
IV. Consumption of wealth.
Therefore, it can be said according to Adam Smith:
“Economics is a science of wealth.”
• Let’s discuss four aspects of property :
• The first one is the production of wealth it shows as to
how goods and services produce . Goods and services
produce by the combination of four factors of
production i.e. land, labor, capital and organization.
• The second aspect is the exchange of wealth there are
many procedures of goods and services in society.
Every process produces goods and services more than
his personal requirement . The exchange of property
enables everyone in the society to satisfy his multiple
wants.
• The third aspect is the distribution of wealth, which
means the distribution of goods and services among
different sections or individuals of society.
• The last and fourth point is consumption of wealth that
is using up the utility of goods and services for the
satisfaction of wants is called the use of capital.
Economics is the study of mankind or
Economics is a Science of Material Welfare!
• Alfred Marshall (1842–1924) pointed out
that, for economics, wealth is not an end in
itself but it is only a means to an end; the end
being the promotion of human welfare.
• According to Marshall, wealth is only a
secondary thing, it is man and his ordinary
business of life which is the primary object of
economic study.
• Marshall gave the following definition of
economics; “ Economics is the study of
mankind in the ordinary business of life”
• It examines that part of individual and social
action which is most closely connected with
the attainment and with the use of the
material requisites of well-being.
Three things are worth noting in the above
definition provided by Marshall.
• First, it is a study of man as such and not of
wealth.
• Economics is concerned with wealth in the
sense that it studies man’s action regarding
how he earns wealth and how he spends it.
• Secondly, Marshall’s definition implies that
economics is concerned with a particular
aspect of man’s life. There are many aspects
of man’s life—social, religious, political, etc.
• Thirdly, according to the above Marshall’s
definition, the primary object and end of
economics is the promotion of material
welfare.
"Economics is a science, which studied human behavior as a
relationship between ends and scarce mean, which have
alternative uses." - L Robins.
• Lionel Charles Robbins, (22 November 1898 –
15 May 1984) was a British economist has
defined economics as a human science
dealing with alternative use or selection of
scarce means and ends concerned with
human behaviour.
• Main Ideas: Robbins definition has been
accepted as a standard definition of the scope
of economics. It has the following aspects:
• Human wants or ends are unlimited.
• Means or resources that are used to meet the
unlimited wants, ends are scarce or limited in
supply.
• It is important to study economics because
that way you learn how to use your money
when buying new stuff like cars, house,
clothes, goods, etc.
• When you get more information you also
learn how money affect people in some way.
For a lot of people money is everything and
stands above love, family, and friends .
• A choice has to be made from among the
multiple wants.
• Such scarce resources can be used
alternatively.
• Logical Explanation : The definition of
economics given by L. Robbins can be
explained with the following points:
• Unlimited Ends of Wants:
• Scarce Means of Resources:
• Alternative Choice
• Economics is science or art or both
• We generally discuss whether Economics is science
or art or both and if it is a science whether it is a
positive science or a normative science or both.
Economics is as science:
A subject is considered science if :
• It is a systematized body of knowledge which
studies the relationship between cause and effect.
• It is capable of measurement.
• It has its own methodological apparatus.
• It should have the ability to forecast.
 If we analyse Economics, we find that it has all the
features of science.
• Like science it studies cause and effect relationship
between economic phenomena. To understand, let us
take the law of demand. It explains the cause and effect
relationship between price and demand for a
commodity.
• It says, given other things constant, as price rises, the
demand for a commodity falls and vice versa.
• Here the cause is price and the effect is fall in quantity
demanded.
• Similarly like science it is capable of being measured,
the measurement is in terms of money.
• It has its own methodology of study (induction and
deduction) and it forecasts the future market condition
with the help of various statistical and non-statistical
tools.
• But it is to be noted that Economics is not a pure
science. This is because Economists do not have
uniform opinion about a particular event.
• The subject matter of Economics is the economic
behavior of man which is highly unpredictable.
• Money which is used to measure outcomes in
Economics is itself a dependent variable.
• It is not possible to make correct predictions about
the behavior of economic variables.
Economics is as an art:
• Art is nothing but practice of knowledge. Whereas
science teaches us to know art teaches us to do.
• Unlike science which is theoretical, art is practical. If we
analyse Economics, we find that it has the features of
an art also.
• Its various branches, consumption, production, public
finance, etc. provide practical solutions to various
economic problems. It helps in solving various
economic problems which we face in our day-to-day
life.
• Thus, Economics is both a science and an art.
• It is science in its methodology and art in its
application.
• Study of unemployment problem is science but framing
suitable policies for reducing the extent of
unemployment is an art.
• Microeconomics & Macroeconomics
• Vital theories or studies of microeconomics are:
(i) Theory of consumer behaviour,
(ii) Theory of price.
(iii) Theory of producer behaviour.
• Vital theories or studies of Macroeconomics are:
(i)Theory related to equilibrium level of output and
employment.
(ii)Theory related to inflationary and deflationary
gap in the economy.
(iii)Theory of multiplier.
(iv)Study of government budget.
(v)Study of exchange rate and Balance of Payments
(BoP).
•
What is the importance of the study of economics from the
point of view of an ordinary citizen, a banker and so on.
• Economics is about choice and is at the heart of all
decision making individuals, businesses and
governments are all faced with making choices in
situations with resources and scarce.
• Economics provides you with the knowledge and
insight necessary to understand the impact of
developments in business, society and the world
economy.
• It enables you to understand the decisions of
households, firms and governments based on
human behaviour, beliefs, structure, constraints and
need.
• Bankers provide funds to develop businesses, buy
houses, and finance education. In addition to
facilitating the building of capital
• Bankers serve the critically important social
function of thwarting silly ideas, i.e., activities
unlikely to earn a return sufficient to repay the loan.
In evaluating business propositions, bankers are
motivated by their responsibility to stockholders.
Demand and supply analysis
 Demand :
• Demand is an economic principle referring to a
consumer's desire to purchase goods and services and
willingness to pay a price for a specific good or service.
• Holding all other factors constant, an increase in the
price of a good or service will decrease the quantity
demanded, and vice versa.
• The desire backed by ability to pay and willingness to
pay is demand.
• There must be resources available to be demand.
• Demand are limited due to price of product, income
constraint etc.
• Demand is affected by determinants.
• Demand takes place only in particular place and time.
• Example; A millionaire wanting to have a car is demand.
 Desire :
• The wish to have something is desire.
• There is no need of resources in desire.
• Desires can be limitless/ endless.
• Desire is not affected by determinants.
• Desire can take place anywhere and any time.
• Example; The beggar wanting to have a car is a
desire.
• The Law of Supply and Demand
• The law of supply and demand is a theory that
explains the interaction between the sellers of a
resource and the buyers for that resource.
• The theory defines the relationship between the
price of a given good or product and the willingness
of people to either buy or sell it.
• Generally, as price increases, people are willing to
supply more and demand less and vice versa when
the price falls.
• The theory is based on two separate "laws," the law
of demand and the law of supply.
• The two laws interact to determine the actual
market price and volume of goods on a market.
• Law of Demand
• The law of demand states that, if all other factors
remain equal, the higher the price of a good, the
less people will demand that good. In other words,
the higher the price, the lower the quantity
demanded. The amount of a good that buyers
purchase at a higher price is less because as the
price of a good goes up, so does the opportunity
cost of buying that good.
• As a result, people will naturally avoid buying a
product that will force them to forgo the
consumption of something else they value more.
The chart below shows that the curve is a
downward slope.
 law of Supply :
• Like the law of demand, the law of
supply demonstrates the quantities that will be
sold at a certain price.
• But unlike the law of demand, the supply
relationship shows an upward slope. This means
that the higher the price, the higher the quantity
supplied.
• From the seller's perspective, the opportunity cost
of each additional unit that they sell tends to be
higher and higher. Producers supply more at a
higher price because the higher selling price
justifies the higher opportunity cost of each
additional unit sold.
 Supply and Demand Curves
• At any given point in time, the supply of a good brought
to market is fixed. In other words, the supply curve in
this case is a vertical line, while the demand curve is
always downward sloping due to the law of diminishing
marginal utility.
• Sellers can charge no more than the market will bear
based on consumer demand at that point in time.
• Over longer intervals of time, however, suppliers can
increase or decrease the quantity they supply to the
market based on the price they expect to be able to
charge.
• So over time, the supply curve slopes upward; the more
suppliers expect to be able to charge, the more they
will be willing to produce and bring to market.
• For all time periods, the demand curve slopes
downward because of the law of diminishing
marginal utility. The first unit of a good that any
buyer demands will always be put to that buyer's
highest valued use. For each additional unit, the
buyer will use it (or plan to use it) for a successively
lower-valued use.
• How Do Supply and Demand Create an Equilibrium
Price?
• Also called a market-clearing price,
the equilibrium price is the price at which the producer
can sell all the units he wants to produce and the buyer
can buy all the units he wants.
• With an upward-sloping supply curve and a downward-
sloping demand curve, it is easy to visualize that at
some point the two will intersect.
• At this point, the market price is sufficient to induce
suppliers to bring to market the same quantity of goods
that consumers will be willing to pay for at that price.
• Supply and demand are balanced, or in equilibrium.
The precise price and quantity where this occurs
depend on the shape and position of the respective
supply and demand curves, each of which can be
influenced by a number of factors.
 Shifts vs. Movement :
• For economics, the "movements" and "shifts" in
relation to the supply and demand curves represent
very different market phenomena.
• A movement refers to a change along a curve. On the
demand curve, a movement denotes a change in both
price and quantity demanded from one point to
another on the curve.
• The movement implies that the demand relationship
remains consistent. Therefore, a movement along the
demand curve will occur when the price of the good
changes and the quantity demanded changes in
accordance to the original demand relationship.
• In other words, a movement occurs when a change in
the quantity demanded is caused only by a change in
price, and vice versa.
• Like a movement along the demand curve, a
movement along the supply curve means that the
supply relationship remains consistent.
• Therefore, a movement along the supply curve will
occur when the price of the good changes and the
quantity supplied changes in accordance to the
original supply relationship.
• In other words, a movement occurs when a change
in quantity supplied is caused only by a change in
price, and vice versa.
 Shifts :
• Meanwhile, a shift in a demand or supply curve occurs
when a good's quantity demanded or supplied changes
even though the price remains the same.
• For instance, if the price for a bottle of pepsi was Tk.20
and the quantity of pepsi demanded increased from Q1
to Q2, then there would be a shift in the demand for
pepsi.
• Shifts in the demand curve imply that the original
demand relationship has changed, meaning that quantity
demand is affected by a factor other than price.
• A shift in the demand relationship would occur if, for
instance, pepsi suddenly became the only type of drinks
available for consumption.
•
• Conversely, if the price for a bottle of beer was $2
and the quantity supplied decreased from Q1 to Q2,
then there would be a shift in the supply of beer.
Like a shift in the demand curve, a shift in the
supply curve implies that the original supply curve
has changed, meaning that the quantity supplied is
affected by a factor other than price. A shift in the
supply curve would occur if, for instance, a natural
disaster caused a mass shortage of hops; beer
manufacturers would be forced to supply less beer
for the same price.
• Factors Affecting Supply
• Supply is largely a function of production costs such as labor
and materials , the physical technology available to combine
inputs; the number of sellers and their total productive
capacity over the given time frame; and taxes, regulations, or
other institutional costs of production.
• Factors Affecting Demand
• Consumer preferences among different goods are the most
important determinant of demand.
• The existence and prices of other consumer goods that are
substitutes or complementary products can modify demand.
• Changes in conditions that influence consumer preferences
can also be important, such as seasonal changes or the effects
of advertising.
• Changes in incomes can also be important in either increasing
or decreasing quantity demanded at any given price.
Distinguish between Cardinal and Ordinal utility
approach. How does a consumer maximize utility?
Show with a suitable model.
Cardinal vs Ordinal Utility
Utility refers to the satisfaction that a consumer
obtains from the purchase and use of commodities
and services. According to economics there are two
theories that are able to measure the satisfaction of
individuals. These are the cardinal utility theory and
the ordinal utility theory.
• Cardinal utility states that the satisfaction that the
consumer derives by consuming goods and services
can be measured with numbers.
• Ordinal utility states that the satisfaction that the
consumer derives from the consumption of goods and
services cannot be measured in numbers. Rather,
ordinal utility uses a ranking system in which a ranking
is provided to the satisfaction that is derived from
consumption.
• While cardinal utility is a quantitative measure, ordinal
utility is a qualitative measure.
• In cardinal utility, it is assumed that consumers derive
satisfaction through consumption of one good at a
time. However, in ordinal utility it is assumed that a
consumer may derive satisfaction from the
consumption of a combination of goods and services,
which will then be ranked according to preference.
 Utility maximization
• Definition :Economics concept that, when making a
purchase decision, a consumer attempts to get the
greatest value possible from expenditure of least
amount of money. His or her objective is to
maximize the total value derived from the available
money.
Utility maximizing rule
• To obtain the greatest utility the consumer should
allocate money income so that the last amount
spent on each good or service yields the same
marginal utility.
• MUx/Px = MUy/Py = MUz/Pz
 But this is really just Benefit-Cost Analysis:
a. Benefit-Cost-Analysis:
• select all where: MB > MC
up to where: MB = MC
but never where: MB < MC
utility maximizing rule:
• MBx = MUx/Px
• The MB of product X can be measured by finding the
MU per Taka spent on product X
• Why divide by price?
• Because you cannot compare a Tk.10 Coke with a Tk.30
steak sandwich
• dividing by price means that we are comparing a Taka's
worth of Coke with a Taka's worth of a steack sandwich
 MCx = MUy/Py
• The MC of product X can be measured by finding
the MU that you are not receiving from a dollar's
worth of your next best alternative (product Y)
Therefore:
• MB = MC
or
• MUx/Px = MUy/Py = MUz/Pz
• To obtain the greatest utility the consumer should
allocate money income so that the last Taka spent
on each good or service yields the same marginal
utility.
 Elasticity in Economics
•The theory of elasticity refers to the responsiveness
of supply and demand to changes in price.
•In economics, elasticity is used to determine how
changes in product demand and supply relate to
changes in consumer income or the producer's price.
•Elasticity = % Change in Quantity / % Change in Price
• The diagram here shows the changes in price (p) of
Ms. Mabel Candy and the corresponding change in
the quantity demanded (q).
• The red slanting line is called the demand curve. At
a price of Tk.1.50, the quantity demanded is three
units.
• When the price is lowered to Tk.0.50, the quantity
in demand increased to five units.
• Ms. Mabel can then make the assumption that
every increase in price will result in fewer purchases
of her candy.
• Elasticity vs. Inelasticity of Demand:
• Inelasticity and elasticity of demand refer to the
degree to which demand responds to a change in
another economic factor, such as price, income
level, or substitute availability.
• Elasticity measures how demand shifts when other
economic factors change.
• When fluctuating demand is unrelated to an
economic factor, it is called inelasticity.
• Price is the most common economic factor used
when determining elasticity or inelasticity. Other
factors include income level
and substitute availability.
• Elastic demand means there is a substantial change
in quantity demanded when another economic
factor changes (typically the price of the good or
service), whereas inelastic demand means that
there is only a slight (or no change) in quantity
demanded of the good or service when another
economic factor is changed.
• Substitute Elasticity of Demand
• If there is an easy substitute for a good or service,
the substitute makes the demand for the good
more elastic. The presence of an alternative good or
service makes the original good or service more
sensitive overall to price changes.
• For example, if the price of Android phones
increases by 10%, this could cause consumers to
demand less Android phones. As a result, an
increase in demand for iPhones leads to more
demand for iPhones. Because iPhone smartphones
are a close substitute in quality and price, consumer
demand for them will rise.
• Examples of Elastic Products
• Common examples of elastic products
are consumer discretionaries, such as a brand of
cereal. Certain food products are not a necessity.
For instance, it’s reasonable to argue that people
would stop buying a particular brand of cereal if its
price shot up dramatically, particularly if other
comparable products didn’t follow suit and kept
their prices the same.
• Conversely, if this same brand of cereals
experienced a steep price cut, we’d expect more
people to buy it, assuming its level of quality is
similar to peers and we aren't in a deep recession.
• Examples of Inelastic Products
• The most common goods with inelastic demand are utilities,
prescription drugs, and tobacco products. In general,
necessities and medical treatments tend to be inelastic, while
luxury goods tend to be the most elastic.
• Another typical example is salt. The human body requires a
specific amount of salt per pound of body weight. Too much
or too little salt could cause illness or even death, so the
demand for it changes very little when price changes—salt
has an elasticity quotient that is close to zero and a steep
slope on a graph.
• While there are no perfectly inelastic goods, there are some
goods that come pretty close. For example, people need gas
to drive their cars. Even if gas prices get higher, people may
not be able to stop commuting to work, taking their kids to
school, and driving to the store. Thus, people will still
purchase gas even at a higher price.
• Cross Elasticity of Demand
• The cross elasticity of demand measures the
responsiveness in the quantity demanded of one
good when the price for another good changes.
• Cross elasticity of demand can refer to substitute
goods or complementary goods.
• When the price of one good increases, the demand
for a substitute good will increase as consumers
seek a substitute for the more expensive item.
• Conversely, when the price for a good increases, any
items closely associated with it and necessary for its
consumption (referred to as complementary goods)
will also decrease.
• The importance of Price Elasticity in Business :
• Elasticity is a concept of economics that affects
businesses. So, they need to understand whether
their goods or services are elastic or inelastic. This
helps them form business strategies and also in the
marketing of those goods or services.
• Companies selling high elasticity goods compete
with other businesses on price and they are
required to have a high volume of sales transactions
to remain solvent.
• On the other hand, firms that sell inelastic goods
that are must-have enjoy the luxury of setting
higher prices without worrying about the decrease
in demand and sales.
• Besides affecting prices, the elasticity of goods also
affects the customer retention rates of a company.
Every business strives to sell goods or services that
have inelastic demands; doing so will ultimately
increase the customer retention rate. The customer
will remain loyal to the business and will continue
to buy the goods/services even in the case of a
price surge
• If we know the price elasticity of demand, we may
know what will happen to total revenue when price
changes:
(1) If price elasticity (ep > 1), reducing the price will
increase the total revenue.
(2) When demand is perfectly inelastic ep = 0, there is no
decrease in quantity demanded when price is raised.
Therefore, a rise in price increases the total revenue
and vice versa.
(3) In case of an inelastic demand (ep < 1), the total
revenue falls when the price is decreased. The total
revenue increases when the price is increased.
(4) When the demand for a product is unitary elastic (ep =
1) quantity demanded increases or decreases in the
proportion of increases or decrease in the price. Hence
total revenue remains unaffected.
Qs.a) Distinguish between free goods, economic
goods, social/ Public goods and Private goods
b) What do you mean by demand and desire? Draw
a hypothetical demand schedule of Rice and Jute &
derive demand curves of these two commodities

Ans : a ) Item of consumption (such as air) that is

useful to people, is naturally in abundant supply, and
needs no conscious effort to obtain it is called free
goods. In contrast, an economic good is scarce in
relation to its demand and human effort is required to
obtain it.
Public good is a good that is both non-excludable
and non-rivalrous in that individuals cannot be
effectively excluded from use and where use by one
individual does not reduce availability to others.[1]
Examples of public goods include fresh air,
knowledge, light houses, national defense, flood
control systems and street lighting. Public goods
that are available everywhere are sometimes
referred to as global public goods
 Private Goods : A private good or service has three
main characteristics:
• Excludability: Consumers of private goods can be
excluded from consuming the product by the seller
if they are not willing or able to pay for it.For
example a ticket to the theatre or a meal in a
restaurant is clearly a private good . Excludability
gives the service provider (the seller) the chance to
make a profit from producing and selling the
product. As we shall see, with public goods, such
excludability does not exist.
• Rivalry: With a private good, one person's
consumption of a product reduces the amount left
for others to consume and benefit from - because
scarce resources are used up in producing and
supplying the good or service. If you order and then
enjoy a pizza from Pizza Hut, that pizza is no longer
available to someone else.
• Rejectability: Private goods and services can be
rejected - if you don't like the soup on the lunch
menu, you can use your money to buy something
else.
• Examples of private goods include Rice, Sugar, Car,
House etc.
 B) Demand:
➢ It is the desire of a person backed by ability, and
willingness to pay.
➢ It has many limits such as income, fashion, etc.
➢ It is a relative term associated with money and time.
➢ A person can demand a car if he has enough money
and willingness to purchase it.

Desire:
➢ It is the wish or willingness of a person to get
something.
➢ It has no limits.
➢ It is an independent term and not related to money.
➢ A person can desire to purchase a car even if he does
not have purchasing power.
 Demand schedules
• A demand schedule shows the relationship between
price and demand over a hypothetical range of
prices. For example, the schedule opposite is based
on a survey of college students who indicated how
many cans of cola they would buy in a week, at
various prices.
PRICE of Rice/Kg QUANTITY DEMANDED
Usd .25 6 Kg

Usd .50 5 kg

Usd .75 4.5kg

Usd 1.00 4 kg

Usd 1.25 3.5kg

Usd 1.50 3 Kg
The law of demands states that all other things being
equal, as price falls the corresponding quantity that is
demanded rises, and vice versa. This law is based on
the following foundations:
i.Common sense and the simple observation that
people buy more of a given product at a low price than
they do at a high price.
ii.The law of diminishing marginal utility: since
successive units of a good yield less and less
satisfaction, consumers will only buy additional units if
the price is reduced.
iii.The fact that if price is reduced, all other things being
constant, the consumer effectively has more
purchasing power, and can buy more of the good in
question as well as other goods.
Demand of Rice : If a good is essential and we
cannot do without it, demand for the good will
remain constant regardless of changes in price.
Rice, Medicine and milk are basic necessities; we
will buy them even if the price rises.
Figure shows The Demand Curve for Rice
Demand of Jute: If a good is not essential and we
can do without it, demand for the good will not
remain constant regardless of changes in price. Jute
is not basic necessities; we will not buy them even if
the price rises.
Islamic Economic System and compare
it with Capitalistic Economic System.
Ans. Some of the principles of the Islamic
economic system, as laid down by the
Qur’an and the Sunnah, are discussed as
follows:
1. Allah determines Right and Wrong:
• Allah is empowered to pronounce what
is right and what is wrong.
• Allah has made demarcation between
lawful and unlawful in the economic
sphere and has allowed man to enjoy
those food items and other articles of
use which are lawful and avoid those
things which are unlawful.
• No human being has power to say what
is right (Halal) and what is wrong
(Haram).
2. Principle of Use:
• Within the bounds of lawful (Halal) and
unlawful (Haram) prescribed by Allah and
also keeping in view the rules of
moderation and prudence, the man has
been allowed to make full enjoyment of
God’s gifts bestowed on him.
 3.Principle of Moderation:
• Islam unequivocally discourages its followers
to cross the limits and follow extremes.
• The Muslims have been called by the Qur’an
a middle nation (2:143).
• Therefore, the principle of moderation
carries paramount importance especially in
the economic field.
• This principle is followed by the true
believers in the production of wealth as well
as in the consumption and spending of
wealth.
4. Economic Freedom:
• Every individual, according to Islam, is accountable
for his actions done in this world.
• He would be rewarded for his good actions and
punished for his evil actions in the hereafter.
• Accountability for individual’s actions is
meaningless if the individual is not provided
reasonable freedom to act independently.
• Therefore, Islam puts highest value on individual’s
freedom of action in every field of human activity
such as social, political, economic religious, moral,
etc.
5.Principle of Justice:
• Islamic principle of justice operates in
every sphere of human activity, may it be
legal, social, political or economic.
• Islamic economic system, in fact is based
upon the principle of justice which
governs all the basic aspects of economy
like production, distribution,
consumption and exchange.
6. Money is Allah’s property :
• This means that Allah holds us accountable for
money issues; how we earn it and how we spend it.
• We are obliged to earn money in a legitimate and
honest fashion and refrain from using it to hurt
others or spending it in an unlawful manner
7. The role of money:
• Money is a means to value items and to facilitate
the exchange or trading of goods; it is not a
commodity in and of itself, nor is it a tradable item,
consequently money itself, is not to be sold, bought
or leased.
8. There is a balance between individual and group
interests: In an Islamic economy, the interests of
both individuals and communities are addressed,
because individuals and communities are not foes
and work in harmony.
9. There is a balance between spiritual needs and
material needs: Islam encourages such a balance.
Allah says: (O ye who believe! When the call is
heard for the prayer of the day of congregation
(Friday), haste unto remembrance of Allah and
leave your trading. That is better for you if ye did
but know. And when the prayer is ended, then
disperse on the land and seek of Allah’s bounty, and
remember Allah much, that ye may be
successful)[Al-Jumua: 9]
10. Islamic economy is an ethical economy:
• In Islam the economy and ethics are
inseparable unlike other economic systems
used in the world,.
• Consequently, the required qualities of a
Muslim economist include being honest,
trustworthy, tolerant, decent, humble,
merciful and caring.
• These qualities are one of the reasons why
Islam spread throughout the Far East, to both
Indonesia and China.
11. Principles of Risk-sharing:
• This is the basis of all Islamic economies and the
characteristic that distinguishes an Islamic economic
system from other systems around the world.
• The sharing of profits and losses is a rule designed to
divide wealth between the capital and the efforts and
it’s the principle that supports justice in wealth
distribution.
12. Private ownership:
• In an Islamic economy, the right to private ownership is
protected providing it does not hurt other members of
the society, which can occur when a monopoly exists.
This characteristic differs from the communist
economic system, which considers everything as public
property
 13. Public ownership:
• In an Islamic economy system, public utilities
that are essential to people’s lives are the
property of the State or under its supervision.
• This approach helps facilitate the basic needs
for all human life and the community’s
interest and is contrary to a capitalist
economic system, which allows the ownership
of everything or anything.
 14. Islam’s system of inheritance:
• In an Islamic economy system the wealth of
deceased individuals is distributed among family
members.
• It is not left to accumulate; rather it is divided and
distributed to inheritors in a specific and detailed
system as outlined in the Holy Quran.
15. Charities and endowment funds:
• Charity is one of the main characteristics of an
Islamic economy.
• It seeks to promote social solidarity and to address
the needs of the poor, by identifying some projects
to raise funds for the needy.
 16. Market monitoring:
• An Islamic economic system has a market
monitoring system,however it does not
interfere by setting or changing prices
such actions are undertaken only to
prevent wrongful action and adjust things
should a transaction be performed
wrong.
17. Usury is Haram : Usury is best described as
the interest one is charged when offered a
loan. Under Islamic law it is strictly forbidden
to charge interest on the loaning of money as
this practice leads to taking advantage of
people and turning the money into a
commodity itself.
18. Monopolies is Haram: Monopolies are
strictly forbidden in Islam because they go
against the interests of the general public.
 19. Limitations on trade practices: The trading
of illegal items is strictly forbidden – this
would include transactions for drugs,
prostitution services, pornographic materials
and alcoholic beverages.
• The principles of capitalistic Economy.
1. Private Property
2. Private Enterprise
3. Competitive Markets
4. Profit Motive
5. Laissez-faire (hands off)
Explain the law of Diminishing returns. Does
the law apply to agriculture and industry
equally ?

Ans:
Definition : In a given state of technology when
the units of variable factors of production are
increased with the units of other fixed factor,
the marginal productivity decreases it is called
law of diminishing returns.
• Assumptions:
The assumptions of the law of diminishing returns
are as follows:

1.Units of capital and labor are used as variable

factors.
2.The prices of the factors do not change.
3.All units of variable factors are equally efficient.
4.There is no change in technique of production.
5.Best combination of factors of production has
crossed the level of optimum point.
6.There is no change in the fixed factor of
production.
 The law of diminishing return can be studied from two
points of view, (i) as it applies to agriculture and (ii) as it
applies in the field of industry.
(1) Operation of Law of Diminishing Returns in
agriculture:
• Traditional Point of View. The classical economists
were of the opinion that the law of diminishing returns
applies only to agriculture and to some extractive
industries, such as mining, fisheries , etc . If farmer
wishes to raise a large quantity of food using huge raw
material from a particular piece of land, he cannot do
so. He knows it fully that the producing capacity of the
soil is limited and is subject to exhaustation. As he
applies more and more units of labor to a given piece
of land, the total production no doubt increases but it
increases at a diminishing rate.
Example : The use of fertilizer improves crop
production on farms and in gardens but at some
point, adding more and more fertilizer improves the
yield less per unit of fertilizer, and excessive
quantities can even reduce the yield.
(2) Operation of the Law in the Field of Industry:
The modern economists are of the opinion that the
law of diminishing returns is not exclusively
confined to agricultural sector, but it has a much
wider application. They are of the view that
whenever the supply of any essential factor of
production cannot be increased or substituted
proportionately with the other sectors, the return
per unit of variable factor begins to decline. The law
of diminishing returns is therefore, also called the
Law of Variable Proportions.
• Example : Adding more workers to a job,
such as assembling a car on a factory
floor. At some point, adding more
workers causes problems such as workers
getting in each other's way or frequently
finding themselves waiting for access to a
part. In all of these processes, producing
one more unit of output per unit of time
will eventually cost increasingly more,
due to inputs being used less and less
effectively.
The law of diminishing returns operates in
agriculture and that of increasing returns in
manufactures generally. But from the limitations of
the law of diminishing returns, we have seen that
even in agriculture, under certain circumstances,
the law of increasing returns may operate.
In the same manner, the law of increasing returns
does not always operate in industry. If the industry
is expanded beyond the optimum point, the returns
will diminish interact of increasing. Hence this
statement is not always true. Correctly speaking,
increasing and diminishing returns are two aspects
of one and the same law. They apply both to
agriculture and to industry, only at different stages.
 Monetary Policy vs. Fiscal Policy:
•Monetary policy and fiscal policy refer to the two
most widely recognized tools used to influence a
nation's economic activity. Monetary policy is
primarily concerned with the management of interest
rates and the total supply of money in circulation and
is generally carried out by central banks .
•Fiscal policy is a collective term for the taxing and
spending actions of governments. In the United
States, the national fiscal policy is determined by the
executive and legislative branches of the
government.
• Both monetary and fiscal policy are macroeconomic
tools used to manage or stimulate the economy.
• Monetary policy addresses interest rates and the
supply of money in circulation, and it is generally
managed by a central bank.
• Fiscal policy addresses taxation and government
spending, and it is generally determined by
government legislation.
• Monetary policy and fiscal policy together have
great influence over a nation's economy, its
businesses, and its consumers.
• Why Monetary Policy
• Central banks typically have used monetary policy
to either stimulate an economy or to check its
growth. By incentivizing individuals and businesses
to borrow and spend, the monetary policy aims to
spur economic activity.
• Conversely, by restricting spending and incentivizing
savings, monetary policy can act as a brake on
inflation and other issues associated with an
overheated economy.
• Monetary policy is more of a blunt tool in terms of
expanding and contracting the money supply to
influence inflation and growth and it has less impact
on the real economy.
• Why Fiscal Policy
• Generally speaking, the aim of most government fiscal
policies is to target the total level of spending, the total
composition of spending, or both in an economy.
• The two most widely used means of affecting fiscal policy are
changes in government spending policies or in government
tax policies.
• If a government believes there is not enough business activity
in an economy, it can increase the amount of money it
spends, often referred to as stimulus spending.
• If there are not enough tax receipts to pay for the spending
increases, governments borrow money by issuing debt
securities such as government bonds and, in the process,
accumulate debt. This is referred to as deficit spending.
•
• By increasing taxes, governments pull money out of
the economy and slow business activity.
• Typically, fiscal policy is used when the government
seeks to stimulate the economy.
• It might lower taxes or offer tax rebates in an effort
to encourage economic growth. Influencing
economic outcomes via fiscal policy is one of the
core tenets of Keynesian economics.