📚 DAY 1: Economics Basics
Microeconomics Foundation – NRB PSC Exam Preparation
📌 Exam: Nepal Rastra Bank (NRB) Public Service Commission Exam
📅 Study Date: Day 1 of 30-Day Preparation Plan
⏱️ Duration: 5-6 hours total
📍 Focus Area: Introduction to Economics & Microeconomics Foundation
📅 Study Date: Day 1 of 30-Day Preparation Plan
⏱️ Duration: 5-6 hours total
📍 Focus Area: Introduction to Economics & Microeconomics Foundation
⏰ Time Allocation (5-6 Hours Total)
| Session | Duration | Topics Covered |
|---|---|---|
| Morning Session | 2.5 hours | Economics Overview + Microeconomics + Practice |
| Afternoon Session | 2.5 hours | Consumer & Producer Theory + Nepal Applications |
| Evening Session | 1 hour | Revision + Next Day Preparation |
☀️ MORNING SESSION (2.5 Hours)
📖 Topic 1: Overview of Economics Discipline (30 minutes)
- Definition of Economics: Economics is the social science that studies human behavior with regard to the production, distribution, and consumption of goods and services in the context of limited resources.
- Scope of Economics: Economics encompasses the study of resource allocation, production possibilities, consumption patterns, and economic systems.
💡 Key Definition
“Economics is the study of how people and societies make choices about WHAT to produce, HOW to produce it, and FOR WHOM to produce.”
🔀 Microeconomics vs Macroeconomics
| Microeconomics | Macroeconomics |
|---|---|
| ✓ Studies individual consumers | ✓ Studies entire economy |
| ✓ Studies individual firms | ✓ Studies aggregate behavior |
| ✓ Price of individual goods | ✓ General price level (inflation) |
| ✓ One market or industry | ✓ All markets combined |
| ✓ Demand & Supply of one product | ✓ Total demand & supply (GDP) |
🎯 Memory Aid: MICRO vs MACRO
MICRO: M = My, I = Individual, C = Consumer, R = Responsibility, O = OpportunitiesMACRO: M = Many, A = Aggregate, C = Country, R = Revenue, O = Overall
🏢 Economic Systems
Capitalism (Market Economy)
✓ Private ownership✓ Market forces (supply-demand)
✓ Consumer sovereignty
✓ Profit motive
✗ May cause inequality
Socialism (Command Economy)
✓ Government control✓ Central planning
✓ Equal distribution goal
✓ No class system
✗ May reduce innovation
Mixed Economy (Nepal’s System)
✓ Both private & government sectors✓ Market + Planning elements
✓ Consumer choice + welfare
✓ Private enterprise with regulations
✓ Social safety nets
Nepal’s Economic System
🇳🇵 Nepal follows MIXED ECONOMY• Private sector: Businesses, industries
• Public sector: Banks, enterprises
• Government regulation & support
📊 Topic 2: Microeconomics Fundamentals (1 Hour)
A. Supply and Demand Concepts
📌 Supply
Supply: The quantity of goods/services that producers are willing and able to offer for sale at various prices during a given time period.
📌 Demand
Demand: The quantity of goods/services that consumers are willing and able to buy at various prices during a given time period.
⚖️ Law of Supply:
“When price increases, quantity supplied increases” (and vice versa)
Reason: Producers earn more profit at higher prices
“When price increases, quantity supplied increases” (and vice versa)
Reason: Producers earn more profit at higher prices
⚖️ Law of Demand:
“When price increases, quantity demanded decreases” (and vice versa)
Reason: Consumers have less purchasing power at higher prices
“When price increases, quantity demanded decreases” (and vice versa)
Reason: Consumers have less purchasing power at higher prices
🎯 Remember: SUPPLY vs DEMAND Direction
SUPPLY: Price UP → Quantity UP (Same direction = Positive relationship)DEMAND: Price UP → Quantity DOWN (Opposite direction = Negative/Inverse relationship)
Memory: “S and D are friends but move differently”
⚡ Market Equilibrium:
The point where Quantity Demanded = Quantity Supplied
At this point, there is NO shortage or surplus
Equilibrium Price: The market-clearing price
Equilibrium Quantity: The amount traded at equilibrium
The point where Quantity Demanded = Quantity Supplied
At this point, there is NO shortage or surplus
Equilibrium Price: The market-clearing price
Equilibrium Quantity: The amount traded at equilibrium
🇳🇵 Nepal Example: Rice Market Equilibrium
Scenario: During monsoon when rice production increases (supply up), prices fall. When rice becomes scarce (supply down), prices rise.
Equilibrium: Fair price where both farmers are willing to sell and consumers willing to buy.
📈 Price Elasticity of Demand and Supply
📌 Price Elasticity of Demand (PED)
Definition: Measures how responsive quantity demanded is to changes in priceFormula: PED = % Change in Quantity Demanded / % Change in Price
Interpretation: How sensitive consumers are to price changes
📐 Price Elasticity Categories:
1. Elastic (|PED| > 1):
• Quantity demanded very responsive to price
• Example: Luxury goods, cinema tickets
• If price ↑ 10%, quantity ↓ more than 10%
• Quantity demanded very responsive to price
• Example: Luxury goods, cinema tickets
• If price ↑ 10%, quantity ↓ more than 10%
2. Inelastic (|PED| < 1):
• Quantity demanded not very responsive
• Example: Salt, medicines, essential foods
• If price ↑ 10%, quantity ↓ less than 10%
• Quantity demanded not very responsive
• Example: Salt, medicines, essential foods
• If price ↑ 10%, quantity ↓ less than 10%
3. Unit Elastic (|PED| = 1):
• Quantity change equals price change
• If price ↑ 10%, quantity ↓ 10%
• Quantity change equals price change
• If price ↑ 10%, quantity ↓ 10%
🎯 Remember Elasticity
“LESS essential = MORE elastic”Luxury items → Elastic (flexible)
Essential items → Inelastic (rigid, people buy anyway)
✏️ PRACTICE: 15-20 MCQ on Supply-Demand (1 Hour)
📝 Multiple Choice Questions
Question 1:
According to the Law of Supply, when the price of rice increases, what happens to the quantity supplied of rice?
✓ Correct Answer: B) Quantity supplied increases
Explanation: The Law of Supply states that there is a positive relationship between price and quantity supplied. When price increases, producers are incentivized to supply more because they earn higher profit. This is the fundamental principle of supplier behavior in economics.
Question 2:
The market equilibrium occurs when:
✓ Correct Answer: B) Quantity demanded equals quantity supplied
Explanation: Market equilibrium is the point where the quantity that consumers want to buy (quantity demanded) exactly equals the quantity that producers want to sell (quantity supplied). At this point, there is no shortage or surplus, and the market clears naturally.
Question 3:
Which of the following is an example of an INELASTIC demand good?
✓ Correct Answer: C) Essential medicines
Explanation: Inelastic goods are necessities that people must buy regardless of price changes. Essential medicines are inelastic because people need them for health/survival. If medicine price rises 20%, people will still buy it because they need it. Luxury items and entertainment are elastic.
Question 4:
According to the Law of Demand, when the price of apples decreases, what happens?
✓ Correct Answer: B) Quantity demanded increases
Explanation: The Law of Demand shows an inverse relationship between price and quantity demanded. When price falls, consumers can afford more, so quantity demanded increases. This is the most fundamental concept in economics.
Question 5:
Which of the following is NOT a determinant of supply?
✓ Correct Answer: C) Consumer preferences
Explanation: Consumer preferences affect DEMAND, not supply. Determinants of supply include: price of product, technology, production costs, number of sellers, prices of related goods, and seller expectations. Remember: Preferences shift DEMAND curve, not supply curve.
Question 6:
If the supply of textiles in Nepal increases while demand remains constant, what will happen to the equilibrium price?
✓ Correct Answer: B) Price will decrease
Explanation: When supply increases (supply curve shifts right) while demand stays same, there is excess supply. To clear the market, prices must fall. This is how markets self-correct. Lower prices encourage consumers to buy more until new equilibrium is reached.
Question 7:
What is the effect of increased consumer income on the demand for normal goods?
✓ Correct Answer: B) Demand increases
Explanation: For normal goods (most goods we consume), when consumer income increases, demand increases. This is because higher income allows consumers to purchase more goods. Example: When Nepali workers receive remittance, they buy more consumer goods.
Question 8:
Which economic system does Nepal primarily follow?
✓ Correct Answer: C) Mixed economy
Explanation: Nepal operates as a mixed economy combining private sector enterprise with government regulation and public sector involvement. It has private businesses (micro-enterprises to large corporations) alongside government enterprises (Nepal Rastra Bank, Nepal Airlines, utilities) with regulatory oversight.
💡 Tip: After answering each question, understand not just the correct answer but WHY it’s correct. This understanding is crucial for the actual NRB exam.
🌤️ AFTERNOON SESSION (2.5 Hours)
👤 Topic 3: Consumer and Producer Theory (1.5 Hours)
A. Utility Concept
📌 Utility
Utility: The satisfaction or benefit a consumer gets from consuming a good or service.
📊 Types of Utility:
1. Total Utility (TU): The complete satisfaction from consuming all units
2. Marginal Utility (MU): The additional satisfaction from consuming one more unit
Formula: MU = Change in Total Utility / Change in Quantity
1. Total Utility (TU): The complete satisfaction from consuming all units
2. Marginal Utility (MU): The additional satisfaction from consuming one more unit
Formula: MU = Change in Total Utility / Change in Quantity
📐 Utility Example:
📌 Law of Diminishing Marginal Utility: As you consume more units, the satisfaction (MU) from each additional unit decreases.
| Units Consumed | Total Utility (TU) | Marginal Utility (MU) |
|---|---|---|
| 1 | 10 | 10 |
| 2 | 18 | 8 (18-10) |
| 3 | 24 | 6 (24-18) |
| 4 | 28 | 4 (28-24) |
| 5 | 30 | 2 (30-28) |
📌 Law of Diminishing Marginal Utility: As you consume more units, the satisfaction (MU) from each additional unit decreases.
🇳🇵 Nepal Example: Ice Cream Consumption
Scenario: On a hot summer day in Kathmandu, the first ice cream gives maximum satisfaction. The second ice cream gives less satisfaction, third even less, and so on.
Why? Your stomach is getting full, and the original craving is satisfied. This demonstrates diminishing marginal utility.
🎯 Remember: TU vs MU
“TU = Total happiness, MU = Extra happiness from one more”• TU generally increases (but at decreasing rate)
• MU always decreases (Law of Diminishing MU)
• When MU = 0, TU is at maximum
⚡ Consumer Equilibrium:
The consumer maximizes total utility when:
MU = Price (in terms of utility per rupee)
In other words: Consumer buys until the satisfaction from last rupee spent equals its cost.
The consumer maximizes total utility when:
MU = Price (in terms of utility per rupee)
In other words: Consumer buys until the satisfaction from last rupee spent equals its cost.
📌 Production Function
Production Function: The relationship between inputs (factors of production) and outputs (goods produced).Formula: Output = f(Land, Labor, Capital, Entrepreneurship)
💰 Cost of Production
📐 Types of Costs:
1. Fixed Costs (FC):
• Do not change with production level
• Example: Factory rent, machinery depreciation
• If production is 0 or 100, FC remains same
• Do not change with production level
• Example: Factory rent, machinery depreciation
• If production is 0 or 100, FC remains same
2. Variable Costs (VC):
• Change with production level
• Example: Raw materials, wages, electricity
• More production = More variable costs
• Change with production level
• Example: Raw materials, wages, electricity
• More production = More variable costs
3. Total Cost (TC):
• TC = Fixed Costs + Variable Costs
• TC = FC + VC
• TC = Fixed Costs + Variable Costs
• TC = FC + VC
4. Average Cost (AC):
• AC = Total Cost / Total Quantity
• Shows cost per unit
• AC = Total Cost / Total Quantity
• Shows cost per unit
5. Marginal Cost (MC):
• MC = Change in Total Cost / Change in Quantity
• Cost of producing one more unit
• MC = Change in Total Cost / Change in Quantity
• Cost of producing one more unit
🇳🇵 Nepal Example: Textile Factory Production Costs
Fixed Costs: Factory building rent (Rs. 500,000/month), machines (Rs. 1,000,000/month depreciation) = Rs. 1,500,000
Variable Costs: Raw fabric, dyes, worker wages increase with production
If production = 0: Still pay Rs. 1,500,000 fixed costs
If production = 10,000 units: Total cost = FC + VC of producing 10,000
🇳🇵 PRACTICAL APPLICATION: Nepal Market Examples (1 Hour)
📌 Example 1: Nepal Tea Market
Supply & Demand: During monsoon season (good growing weather), tea leaf supply increases, prices fall. During winter (poor growing), supply decreases, prices rise.
Nepal Context: Darjeeling and Nepali tea exports to India and international markets. Quality variations affect price elasticity.
📌 Example 2: Kathmandu Real Estate Market
Supply & Demand: Limited land supply, high demand from migrants increases prices. Price elasticity is low (inelastic) because people need housing regardless of price.
Market Equilibrium: Equilibrium price determined by available land and buyer demand.
📌 Example 3: Nepal’s Agricultural Sector
Production Function: Output depends on land, labor (farmers), capital (irrigation, machinery), technology
Costs: Fixed costs = land leases, machinery; Variable costs = seeds, fertilizer, labor wages
Challenges: Monsoon affects production, price fluctuations impact farmer income
📌 Example 4: Nepal’s Remittance Economy
Income Effect: Increased remittance income → Increased demand for normal goods (food, clothing, housing)
Market Impact: Increased demand for products → Prices tend to rise → Inflation concerns
Nepal Context: ~30% of GDP comes from remittances; affects entire demand structure
⚠️ Price Control Mechanisms in Nepal:
1. Maximum Price Controls:
• Government sets maximum price (price ceiling)
• Purpose: Make essential goods affordable
• Example: Government controls on essential medicines, cooking gas
• Problem: Can create shortages (suppliers unwilling to supply at low price)
2. Minimum Price Controls:
• Government sets minimum price (price floor)
• Purpose: Support farmers, workers
• Example: Minimum wage, agricultural support prices
• Problem: Can create surpluses (over-supply at high price)
1. Maximum Price Controls:
• Government sets maximum price (price ceiling)
• Purpose: Make essential goods affordable
• Example: Government controls on essential medicines, cooking gas
• Problem: Can create shortages (suppliers unwilling to supply at low price)
2. Minimum Price Controls:
• Government sets minimum price (price floor)
• Purpose: Support farmers, workers
• Example: Minimum wage, agricultural support prices
• Problem: Can create surpluses (over-supply at high price)
🌙 EVENING SESSION (1 Hour)
✅ Summary and Key Points Revision (30 minutes)
📋 Day 1 Key Takeaways
1. Economics Definition: Study of how scarce resources are allocated among unlimited wants.
2. Micro vs Macro: Micro = Individual consumers/firms; Macro = Entire economy
3. Nepal’s Economic System: Mixed Economy (private + public sectors)
4. Law of Supply: Price ↑ → Quantity Supplied ↑ (Positive relationship)
5. Law of Demand: Price ↑ → Quantity Demanded ↓ (Inverse relationship)
6. Market Equilibrium: Where QD = QS (No shortage or surplus)
7. Price Elasticity: Measures responsiveness to price changes
• Elastic (>1): Responsive (luxury goods)
• Inelastic (<1): Not responsive (essentials)
• Elastic (>1): Responsive (luxury goods)
• Inelastic (<1): Not responsive (essentials)
8. Utility: Satisfaction from consuming goods
• Total Utility: Complete satisfaction
• Marginal Utility: Extra satisfaction from one more unit
• Law of Diminishing MU: MU decreases with more consumption
• Total Utility: Complete satisfaction
• Marginal Utility: Extra satisfaction from one more unit
• Law of Diminishing MU: MU decreases with more consumption
9. Production Costs:
• Fixed Costs: Don’t change with production
• Variable Costs: Change with production
• Total Cost = FC + VC
• Fixed Costs: Don’t change with production
• Variable Costs: Change with production
• Total Cost = FC + VC
10. Nepal Context: Price controls on essential items; remittance-driven demand; agricultural production challenges
📚 Prepare for Day 2 (30 minutes)
📖 Day 2 Preview: Macroeconomics
Topics to prepare for:
• National Income Accounting (GDP, GNP, NDP)
• Inflation and its measurement (CPI)
• Unemployment concepts and types
• Nepal’s economic indicators
Preparation Task:
• Review any economics textbook chapter on national income
• Note down Nepal’s current GDP, inflation rate, unemployment rate
• Understand difference between GDP and GNI
Topics to prepare for:
• National Income Accounting (GDP, GNP, NDP)
• Inflation and its measurement (CPI)
• Unemployment concepts and types
• Nepal’s economic indicators
Preparation Task:
• Review any economics textbook chapter on national income
• Note down Nepal’s current GDP, inflation rate, unemployment rate
• Understand difference between GDP and GNI
🎯 Critical Points to Remember for Exam
🔑 MOST IMPORTANT MNEMONICS
1. SUPPLY-DEMAND Direction:“S goes UP with price; D goes DOWN with price”
2. Elasticity Types (LESS Essential = MORE Elastic):
Elastic (E>1): Exciting, Extravagant, Entertainment = Luxury
Inelastic (E<1): Important, Indispensable = Essentials
3. Utility Diminishes:
“First ice cream = Best; Second = Good; Third = OK; Fourth = Blah!”
4. Cost Composition:
“TC = Fixed + Variable”
“Pay FC even if production is ZERO”
5. Equilibrium Conditions:
“EQ = Equal: QD = QS”
6. Market Adjustments:
“Supply Up, Price Down” (inverse)
“Demand Up, Price Up” (same direction)
⭐ EXAM TIPS:
• Most common exam questions: Law of Supply/Demand, elasticity types, equilibrium
• Always think about real-world examples (Nepal context)
• Read questions carefully – sometimes asks for INVERSE relationships
• Don’t confuse “Supply” with “Quantity Supplied” (policy vs market response)
• Essential goods are INELASTIC (people buy anyway despite price)
• Most common exam questions: Law of Supply/Demand, elasticity types, equilibrium
• Always think about real-world examples (Nepal context)
• Read questions carefully – sometimes asks for INVERSE relationships
• Don’t confuse “Supply” with “Quantity Supplied” (policy vs market response)
• Essential goods are INELASTIC (people buy anyway despite price)
📝 Additional Practice Questions (5 More)
Question 9:
What is the primary reason why Marginal Utility decreases as consumption increases?
✓ Correct Answer: B) Consumer satisfaction is already partially fulfilled
Explanation: This is the Law of Diminishing Marginal Utility. As you consume more of a product, your original need/want is increasingly satisfied. Each additional unit provides less new satisfaction than previous units. This is a psychological/physiological principle, not related to price or supply changes.
Question 10:
In a market, if quantity demanded is greater than quantity supplied, what will happen?
✓ Correct Answer: A) A shortage occurs and prices rise
Explanation: When QD > QS, there’s a shortage (buyers want more than sellers have). This creates upward pressure on prices. As prices rise, quantity demanded falls and quantity supplied increases until they meet at equilibrium. This is the market’s self-correction mechanism.
📚 Study Resources for Day 1
📖 Recommended Textbooks:
- Principles of Microeconomics – Basic economics fundamentals
- Nepal Economic Survey – Current economic data and statistics
- NRB Publications – Banking and economic policies
🌐 Online Resources:
- NRB Official Website: www.nrb.org.np – Official policies and data
- Nepal Central Bureau of Statistics: www.cbs.gov.np – Economic data
- Ministry of Finance: mof.gov.np – Economic reports
📊 Data to Track:
- Current inflation rate in Nepal
- Exchange rate (NRs per USD)
- Current lending rates of commercial banks
- Nepal’s export and import values
✅ Self-Assessment Checklist
I understand the definition and scope of economics
I can differentiate between microeconomics and macroeconomics
I can explain the Law of Supply and Law of Demand correctly
I understand market equilibrium and how it’s determined
I can differentiate between elastic and inelastic demand with examples
I understand utility concepts (total and marginal)
I can explain the Law of Diminishing Marginal Utility
I understand production costs (fixed and variable)
I can apply economics concepts to Nepal’s economy
I can answer 80%+ of the practice MCQ correctly