Economics for Bankers: Demand, Elasticity, National Income and Policy
Economics for Bankers tests scarcity and choice, demand and supply, elasticity, national income measurement, inflation, monetary and fiscal policy, and the links between these forces and bank lending. Expect numerical elasticity and GDP questions alongside definitional ones.
Demand, supply and equilibrium
Demand curves slope downward and supply curves upward. Equilibrium is where quantity demanded equals quantity supplied. A change in price moves along the curve; a change in income, tastes, substitute prices or expectations shifts the curve. Opportunity cost is the value of the next best alternative forgone.
Elasticity
Price elasticity of demand equals percentage change in quantity demanded divided by percentage change in price, usually reported as an absolute value. Above 1 is elastic, below 1 is inelastic, exactly 1 is unit elastic. Substitutes, necessity, time horizon and income share determine elasticity. Loan demand responds to markup changes in the same way.
National income and policy
Expenditure approach: GDP = C + I + G + (X - M). Real GDP removes price effects. The State Bank of Pakistan sets the policy rate and uses open market operations, cash reserve requirements and statutory liquidity requirements. Fiscal policy is government spending and taxation. Inflation erodes real returns and can trigger tighter monetary policy.
Worked example
A 10% rise in price cuts quantity demanded by 25%. PED = 25 / 10 = 2.5, so demand is elastic. Total revenue changes by 1.10 x 0.75 = 0.825, a fall of 17.5%. Because demand is elastic, a price increase loses revenue; a bank raising markups sharply on elastic loan demand should expect a fall in interest income.
Traps
Confusing a shift with a movement along a curve, dropping the negative sign inconsistently, mixing nominal and real GDP, and treating inflation as a rise in one price rather than the general price level.