Unit 1: Basic Economics — RBB Level 5

Loksewa Notes

(Exam pattern: 5 questions × 10 marks — each answer below

is written at that depth)

1.1 Scarcity of Resources and Choices, Efficient

Allocation
Mnemonic: "SCARCE" → Supply limited, Choice forced, Allocation
needed, Resources finite, Cost of choosing, Efficiency goal.

Definition:
Scarcity is the basic economic problem that arises because human
wants are unlimited but the resources (land, labour, capital,
entrepreneurship) available to satisfy them are limited. Because
resources are scarce, every economy — whether capitalist, socialist,
or mixed — must make choices about what to produce, how to
produce, and for whom to produce.

Why Scarcity Leads to Choice:

Unlimited wants vs. limited means forces prioritization.

Every choice made means giving up an alternative → this gives
rise to opportunity cost.
Scarcity applies to individuals, firms, and nations equally (e.g.,
Nepal must choose between spending budget on hydropower vs.
education vs. health).

Three Central Economic Questions (arise from scarcity):

 1. What to produce? – Which goods/services and in what
quantities.
2. How to produce? – Labour-intensive vs. capital-intensive
methods.
3. For whom to produce? – Distribution of output among people.

Efficient Allocation of Resources:

Efficient allocation means resources are distributed among competing
uses in a way that maximizes output/welfare with minimum waste.
Two key concepts:

Productive efficiency – producing goods at the lowest possible

cost (on the Production Possibility Curve, not inside it).
Allocative efficiency – producing the combination of goods that
society values most (right point on the PPC matching consumer
preference).

Production Possibility Curve (PPC):

A curve showing maximum combinations of two goods an economy
can produce with given resources and technology. Points inside the
curve = inefficient/underutilized resources; points on the curve =
efficient; points outside = currently unattainable (needs growth). The
curve is generally concave due to the law of increasing opportunity
cost.

Nepal Context (for exam relevance):

Nepal faces scarcity of capital, skilled manpower, and infrastructure.
It must choose between consumption vs. investment, agriculture vs.
industry, etc. Efficient allocation is critical because Nepal has limited
fiscal resources and heavy reliance on foreign aid/remittance.

Exam tip: Draw the PPC diagram, label axes with two goods (e.g.,
"Agricultural goods" and "Industrial goods"), mark a point inside
(inefficiency), on the curve (efficiency), and outside (unattainable) to
earn extra marks.
1.2 Demand and Supply
Mnemonic: "DEMAND falls, SUPPLY rises" with price — Law of
Demand = Inverse; Law of Supply = Direct.

Demand:
Demand refers to the quantity of a good/service that consumers are
willing and able to purchase at a given price during a given time
period.

Law of Demand: Other things being equal (ceteris paribus), as price

of a good rises, quantity demanded falls, and vice versa — an inverse
relationship, shown by a downward-sloping demand curve.

Determinants of Demand (mnemonic "PRICE-T"):

Price of the good itself

Related goods' prices (substitutes & complements)
Income of consumer
Consumer tastes/preferences
Expectations of future price
Total number of buyers (population)

Supply:
Supply is the quantity of a good/service that producers are willing
and able to offer for sale at a given price during a given time period.

Law of Supply: Other things equal, as price rises, quantity supplied

rises — a direct/positive relationship, shown by an upward-sloping
supply curve.

Determinants of Supply:

Price of the good, cost of inputs, technology, price of related

goods, number of sellers, government policy/tax, and future price
expectations.
Market Equilibrium:
The point where the demand curve intersects the supply curve —
quantity demanded = quantity supplied, and price is stable
→ surplus (excess
(equilibrium price). If price is above equilibrium
supply), pushing price down. If below equilibrium → shortage (excess
demand), pushing price up.

Shifts vs. Movements (important exam distinction):

A change in the price of the good itself causes movement along

the curve.
A change in any other determinant causes the entire curve to
shift (left = decrease, right = increase).

Elasticity (brief, often asked together):

Price elasticity of demand measures responsiveness of quantity
demanded to a price change (% change in Qd ÷ % change in P).
Necessities are inelastic; luxuries are elastic.

Nepal Context: Demand-supply mismatch explains price hikes in

essential commodities (e.g., LP gas, vegetables) during festivals or
border disruptions; also explains volatility in Nepal's real estate and
remittance-driven consumption demand.

Exam tip: Always draw the standard demand-supply diagram with

equilibrium point E, price on Y-axis, quantity on X-axis — examiners
reward diagrams heavily.

1.3 Cost and Benefit, Opportunity Cost

Mnemonic: "TFAMO" for cost types → Total, Fixed, Average,
Marginal, Opportunity.

Cost:
Cost refers to the expenditure incurred by a producer to produce
goods/services.
Types of Cost:

Fixed Cost (FC): Does not change with output (rent, salary of
permanent staff) — exists even at zero output.
Variable Cost (VC): Changes directly with output (raw material,
wages of casual labour).
Total Cost (TC) = FC + VC
Average Cost (AC) = TC ÷ Quantity
Marginal Cost (MC): Additional cost of producing one more unit
of output.

Benefit:
Benefit is the satisfaction, utility, or revenue gained from consuming
a good or undertaking an economic activity. In cost-benefit analysis,
a project/decision is worthwhile only if Total Benefit > Total Cost.

Cost-Benefit Analysis (CBA):

A systematic technique to compare the total expected costs of a
decision/project against total expected benefits, used heavily in
public policy and banking project appraisal (loan approval,
→ quantify in
infrastructure projects). Steps: identify costs & benefits
monetary terms → discount future values to present value →
compare (Net Present Value, Benefit-Cost Ratio).

Opportunity Cost:
Opportunity cost is the value of the next best alternative foregone
when a choice is made. It arises directly from scarcity — since
resources are limited, choosing one option means sacrificing another.

Example: If a farmer uses land to grow rice instead of wheat, the

opportunity cost of rice is the wheat output given up.

Example (banking-relevant): The opportunity cost of holding cash idle

instead of investing it is the interest/return foregone.

Why Important:
 Helps in rational decision-making for individuals, firms, and
government.
Central to concepts like the PPC (slope of PPC = opportunity
cost).
Used in banking to evaluate loan/investment alternatives (cost of
capital, discount rate).

Explicit vs. Implicit Cost:

Explicit cost: Actual money payment (wages, rent, raw material).

Implicit cost: Non-monetary/imputed cost of using own resources
(owner's own capital, own building) — often equals opportunity
cost.
Economic Profit = Total Revenue – (Explicit + Implicit Cost), which
is stricter than Accounting Profit = Total Revenue – Explicit Cost
only.

Exam tip: Always give one clear numerical or real-life example of

opportunity cost — examiners favor applied answers over pure
theory.

1.4 Market Structure

Mnemonic: "PMOM" → Perfect competition, Monopoly, Oligopoly,
Monopolistic competition.

Market structure refers to the organizational and competitive

characteristics of a market that determine the behavior of firms —
number of sellers, nature of product, entry/exit conditions, and price
control.

1. Perfect Competition

Large number of buyers and sellers; homogeneous (identical)

product.
 Free entry and exit; firms are "price takers" (no individual control
over price).
Perfect information available to all.
Example: agricultural commodity markets (idealized).

2. Monopoly

Single seller controls the entire market; no close substitutes.

High barriers to entry (legal, natural, or economic).
Firm is a "price maker."
Example: Nepal Electricity Authority (in transmission), government
utility monopolies.

3. Monopolistic Competition

Many sellers, but products are differentiated (branding, quality,

packaging).
Relatively free entry/exit; firms have some price control due to
brand loyalty.
Example: restaurants, toothpaste brands, tailoring shops.

4. Oligopoly
Few large firms dominate the market; products may be
homogeneous or differentiated.
High barriers to entry; firms are interdependent (each firm's
pricing decision affects rivals).
Example: Nepal's telecom sector (Ntc, Ncell), cement industry,
commercial banking sector to some extent.

Comparison Table (write in exam for extra marks):

 Perfect Monopolistic
Feature Monopoly Oligopoly
Comp. Comp.

No. of
Many One Many Few
sellers

Product Identical Unique Differentiated Similar/Differentiated

Entry
None Very high Low High
barrier

Price
None Full Some Interdependent
control

Relevance to Banking Sector:

Nepal's banking industry itself is often analyzed as
oligopolistic/monopolistically competitive — many banks (differentiated
services/branding) but regulated entry (NRB licensing) and
interdependent pricing (interest rate decisions influenced by
competitor banks and NRB directives).

Exam tip: A comparative table like above is the fastest way to score
full marks in a "distinguish between market structures" question.

1.5 Growth and Development

Mnemonic: "Growth = Quantity, Development = Quality"

Economic Growth:
A quantitative increase in a country's output of goods and services
over time, usually measured by the rate of increase in Real GDP or
GNP over a period (year). It is a narrower concept focused purely on
numbers.

Economic Development:
A broader, qualitative concept referring to improvement in living
standards, literacy, health, income distribution, infrastructure, and
overall well-being of the population, alongside growth. Growth is a
necessary but not sufficient condition for development.

Key Differences (important for 10-mark "distinguish" question):

Basis Economic Growth Economic Development

Nature Quantitative Qualitative + Quantitative

Narrow (GDP/GNP Broad (welfare, equity,

Scope
rise) health, education)

HDI (Human Development

GDP growth rate,
Measurement Index), literacy, life
per capita income
expectancy

Both developed &

Applicable to Mainly developing nations
developing nations

May not reduce Aims to reduce poverty &

Distribution
inequality inequality

Indicators of Growth: GDP, GNP, Per Capita Income, growth rate (%).

Indicators of Development: Human Development Index (HDI —

combines income, education, life expectancy), Human Poverty Index,
literacy rate, infant mortality rate, access to clean water/electricity,
Gini coefficient (income inequality).

Determinants of Growth & Development:

Capital formation/investment
Technological progress
Human capital (education, skill, health)
Natural resources
Institutional quality & good governance
Political stability
Nepal Context:
Nepal has shown moderate GDP growth (fluctuating around 4-6%
pre-pandemic, disrupted by COVID-19 and earthquakes) but
development indicators (HDI) remain low compared to South Asian
peers due to weak infrastructure, poor industrialization, high youth
outmigration, and dependence on remittance (roughly a quarter of
GDP) rather than productive investment.

Exam tip: Mention that Nepal graduated from LDC (Least Developed
Country) status considerations are ongoing — examiners like current,
applied points connecting theory to Nepal's actual economic situation.

1.6 Nepalese Economy: Status, Prospects and

Challenges
Mnemonic: "SPC" → Status, Prospects, Challenges — structure your
answer in exactly these 3 parts.

A. Current Status

Nepal is a landlocked, developing, agrarian economy transitioning

gradually toward services and remittance-driven growth.
Structure of GDP: Agriculture ~24-25%, Industry ~13%, Services
~57-60% (services-dominated, but agriculture still employs the
majority of the labour force — a sign of structural imbalance).
Heavy dependence on remittance income (~22-25% of GDP),
making Nepal one of the most remittance-dependent economies
in the world.
Per capita income remains low relative to South Asian peers.
High trade deficit — imports far exceed exports (import-
dependent for fuel, vehicles, machinery, even food items).
Nepal is set to graduate from Least Developed Country (LDC)
status (a major current-affairs point to mention).
B. Prospects (Potential Growth Areas)

1. Hydropower – Huge untapped potential (~83,000 MW theoretical

capacity); energy exports to India/Bangladesh possible.
2. Tourism – Natural and cultural heritage (mountains, Lumbini,
national parks) offers strong revenue and employment potential.
3. Agriculture modernization – Commercialization, organic farming,
and agro-processing for export.
4. Remittance-to-investment channeling – Converting remittance
from consumption into productive investment (bonds, hydropower
shares).
5. Federal structure – Decentralized governance can enable local-
level development if implemented well.
6. Youth workforce – Large working-age population (demographic
dividend) if properly skilled and employed domestically.

C. Challenges
1. Political instability – Frequent government changes affecting
policy continuity.
2. Weak infrastructure – Poor roads, irregular electricity
(historically), inadequate industrial base.
3. Trade deficit & low exports – Narrow export base (mainly primary
goods), heavy import bill.
4. Brain drain / labour migration – Loss of skilled and youth
workforce abroad.
5. Low industrialization – Manufacturing sector contribution to GDP
remains very small.
6. Poor capital expenditure absorption – Government consistently
fails to spend its full development budget each fiscal year.
7. Natural disaster vulnerability – Earthquakes, floods, landslides
affecting infrastructure and growth.
8. Governance & corruption issues – Weak institutional capacity,
bureaucratic delays.
 9. COVID-19 and external shocks – Exposed vulnerability of
remittance and tourism-dependent economy.

Exam tip: For a 10-mark question, write a brief intro (2 lines), then 3
clearly labeled sub-headings (Status/Prospects/Challenges) with 4-5
bullet points each — this structured format is what examiners scan for
quickly and reward with full marks.

1.7 Monetary and Fiscal Policy

Mnemonic: "Monetary = Money/NRB, Fiscal = Finance/Government"

Monetary Policy
Monetary policy refers to the actions taken by the central bank
(Nepal Rastra Bank - NRB) to control money supply, credit, and
interest rates in the economy in order to achieve macroeconomic
goals like price stability, economic growth, and employment.

Objectives:

Price/inflation stability
Economic growth support
Exchange rate stability
Financial sector stability
Employment generation

Tools/Instruments of Monetary Policy:

1. Bank Rate / Policy Rate – Rate at which NRB lends to commercial

banks; raising it makes borrowing costlier (contractionary),
lowering it is expansionary.
2. Cash Reserve Ratio (CRR) – % of deposits banks must keep with
NRB; raising CRR reduces lendable funds.
3. Statutory Liquidity Ratio (SLR) – % of deposits banks must hold in
liquid assets.
 4. Open Market Operations (OMO) – Buying/selling government
securities to inject or absorb liquidity.
5. Repo Rate/Reverse Repo – Short-term borrowing/lending rates
between NRB and banks.
6. Moral Suasion & Directives – NRB persuading/directing banks
informally or via circulars.

Types:

Expansionary (Easy) Monetary Policy: Lowers interest rates,

increases money supply — used to boost growth/fight recession.
Contractionary (Tight) Monetary Policy: Raises interest rates,
reduces money supply — used to control inflation.

Fiscal Policy

Fiscal policy refers to the use of government revenue (taxation) and

expenditure (spending) to influence the economy, formulated by the
Ministry of Finance / Government of Nepal (announced via the
annual Budget).

Objectives:

Resource mobilization
Equitable income distribution
Economic stability (controlling inflation/deflation)
Boosting growth & employment through public investment

Tools/Instruments of Fiscal Policy:

1. Taxation – Direct taxes (income tax, corporate tax) and indirect

taxes (VAT, excise, customs).
2. Government Expenditure – Recurrent (salaries, admin) and
Capital/Development expenditure (infrastructure).
3. Public Debt/Borrowing – Domestic and foreign borrowing to
finance deficit.
 4. Subsidies and Transfers – Direct support to targeted
sectors/people.

Types:

Expansionary Fiscal Policy: Increased government spending /

reduced taxes — used during recession to stimulate demand.
Contractionary Fiscal Policy: Reduced spending / increased taxes
— used to control inflation or reduce deficit.

Key Distinction Table (high-value for exam):

Basis Monetary Policy Fiscal Policy

Formulated Nepal Rastra Bank Ministry of Finance /

by (Central Bank) Government

Interest rate, CRR, Taxation, public

Tools
SLR, OMO expenditure, borrowing

Money supply & Revenue & expenditure

Focus
credit control management

Usually annual (budget-

Flexibility Can change quickly
based), less flexible

Impact Banking/financial Direct government

channel system spending/taxation

Coordination: In practice, monetary and fiscal policy must work

together (policy mix) — e.g., if the government runs an expansionary
fiscal policy (high spending) while NRB pursues tight monetary policy,
they can offset each other. Coordination between NRB and Ministry
of Finance is essential for macroeconomic stability in Nepal.

Nepal Context: NRB has been using monetary tools to manage

recurring liquidity crunches in the banking sector and to control
imported inflation; the government's fiscal policy (annual budget) has
faced criticism for low capital expenditure absorption despite
expansionary allocations.

Exam tip: Always end with the comparison table AND one line on
coordination between the two policies — this "policy mix" point is a
favorite add-on examiners look for in advanced answers.

Quick Revision Summary (Night-before-exam

page)

Topic One-line Core Idea

1.1 Scarcity & Unlimited wants + limited resources → choice →

Allocation opportunity cost → efficient allocation via PPC

1.2 Demand & Demand ↓ as price ↑; Supply ↑ as price ↑;

Supply equilibrium where both meet

1.3 Cost &

Cost of choice = value of best alternative
Opportunity
foregone; CBA compares total cost vs benefit
Cost

4 types: Perfect Comp. (many, identical) →

1.4 Market Monopoly (one, no substitute) → Monopolistic
Structure Comp. (many, differentiated) → Oligopoly (few,
interdependent)

1.5 Growth vs Growth = quantity (GDP↑); Development =

Development quality (HDI, welfare, equity)

Status: services-led, remittance-dependent;

1.6 Nepalese
Prospects: hydropower, tourism; Challenges:
Economy
political instability, trade deficit
Topic One-line Core Idea

1.7 Monetary & Monetary = NRB controls money/interest; Fiscal =

Fiscal Policy Govt controls tax/spending; both must coordinate