Study Notes

Economics is the study of how people use scarce resources to satisfy unlimited wants. The word comes from the Greek "Oikonomikos" (household management). Adam Smith, Marshall and Robbins gave three famous definitions. Economics is divided into micro & macro, and positive & normative branches.

Demand is the quantity of a good buyers are willing and able to buy at each price; supply is the quantity sellers are willing and able to sell. The law of demand shows an inverse price-quantity relation; the law of supply shows a direct one. Market equilibrium occurs where Qd = Qs.

Elasticity measures how responsive quantity is to a change in price (or income, or related-good price). Price elasticity of demand Ed = %ΔQd / %ΔP. Types range from perfectly elastic (Ed=∞) to perfectly inelastic (Ed=0). Income elasticity and cross elasticity classify goods as normal, inferior, substitutes, complements.

Utility is the want-satisfying power of a commodity. The cardinal approach (Marshall, Pigou) treats utility as measurable in "utils"; the ordinal approach (Hicks, Allen) ranks bundles. Total utility rises as marginal utility is positive, peaks when MU=0, and falls when MU<0 — the Law of Diminishing Marginal Utility. Consumer equilibrium: MUx/Px = MUy/Py.

Production is the transformation of inputs (land, labour, capital, materials) into output. The production function Q = f(L, K, ...) is a technical relationship. In the short run, at least one factor is fixed — the Law of Variable Proportions operates with three stages (increasing, diminishing, negative returns). In the long run, all factors vary and the Laws of Returns to Scale (increasing, constant, decreasing) apply.

Macroeconomics studies the economy as a whole — aggregates like national income, total employment, and the general price level. It was developed after John Maynard Keynes published "The General Theory" in 1936. Nepal's economy is an open economy with significant remittance inflows, summarised by Y = C + I + G + (X − M).

National income is the total income earned by all individuals of a country in a year. The key concepts are GDP, GNP, NNP, NI, PI, DI and PCI. Nepal's GDP in FY 2080/81 was about Rs 5381.34 billion. GDP is measured in three ways — product, income, and expenditure — and the expenditure identity is Y = C + I + G + (X − M). Real GDP removes price-change effects via the GDP deflator.

Money evolved from barter to overcome its seven difficulties. Modern money serves as a medium of exchange, measure of value, store of value and standard of deferred payment. Fisher's Quantity Theory of Money (MV = PT) links money supply to the price level. Nepal's inflation rate in FY 2080/81 was about 7.9%, controlled by the Nepal Rastra Bank through monetary policy. e-Sewa and Khalti are popular forms of electronic money in Nepal.

Economic growth is a quantitative increase in real GNP; economic development is broader — growth plus improvement in quality of life (education, health, environment). Nepal is a developing country with HDI rank 143 and poverty rate 18.7%. Capital formation happens in three stages: saving → mobilisation of savings → investment, leading to higher output.

Nepal is a least developed country with GDP ≈ Rs 5381.34 billion, PCI ≈ US $1410, GDP growth ≈ 1.86%, remittance ≈ Rs 1007.31 billion (≈ 20.4% of GDP), agriculture ≈ 24.1% of GDP, inflation ≈ 7.9%, HDI ≈ 0.602 (rank 143), poverty ≈ 18.7%. Nepal is federal with seven provinces, each with its own economic profile. Heavy remittance dependence and a large trade deficit are key challenges.

Natural resources are gifts of nature — water, forest, land, minerals, air — that humans use to satisfy their wants. Nepal is the 2nd-richest country in water in the world (1st in Asia) with about 83,000 MW hydropower potential, has 45.31% of its area under forest, and is rich in minerals like limestone, iron, and marble. But mismanagement, deforestation, and climate change threaten these resources, so a sustainable management approach is essential.

Agriculture is the **backbone of the Nepalese economy** — it employs about **50.1%** of the labour force and contributes about **24.1%** of GDP. Nepalese agriculture is characterised by subsistence farming, traditional methods, small fragmented landholdings, low productivity, and geographical variation. Modernising requires irrigation, improved seeds, fertilizers, mechanisation, market access, and credit. Sources of agricultural finance include both formal (NRB, commercial banks, cooperatives) and informal (money lenders, friends) lenders. The agricultural market faces problems of middlemen, lack of storage, and poor transport; remedial measures include collection centres, cold stores, and market information systems.

An **industry** is a group of manufacturers that produce a particular good or service. In Nepal, industries are classified by fixed assets (micro, cottage, small, medium, large) and by nature of goods (agro-based, mineral, tourism, ICT). Modern industry began with the **Biratnagar Jute Mill (1936)** set up by Juddha Shamsher Rana — known as the "father of industry in Nepal". After 1990's liberalisation, the sector grew but still faces problems of power shortage, raw material imports, labour issues, and political instability. **Tourism** is another major industry — Nepal welcomed ~1.2 million tourists in 2023, supporting hotels, trekking, and pilgrimage; but the COVID-19 crash of 2020-21 (only ~150k tourists) showed how fragile the sector is.

**Transportation** moves people and goods from one place to another — roads (Mahendra Highway, north-south highways), air (Tribhuvan International Airport + domestic airports), ropeway, and railway (limited in Nepal). Transport promotes agriculture, industry, tourism, balanced regional development, and national integration. **Communication** is the exchange of information — postal services, telecom (NTC, Ncell), radio (FM), television, internet. Nepal's telecom and internet penetration has grown rapidly, but rural areas still lag. Both transport and communication are essential infrastructure for economic development.

Economics uses **mathematics and statistics** as quantitative tools to express relationships precisely, analyse data, and solve problems. **Basic mathematics** (addition, subtraction, multiplication, division) is the foundation; on top of it sit **arithmetic, geometry, algebra, and calculus**. Mathematics helps economists (1) study cause-effect relationships, (2) analyse three or more values, (3) convert sentences into symbols, (4) express economic phenomena algebraically, (5) find slopes of curves, (6) study marginal and total concepts, and (7) solve linear and non-linear programming problems. Key equations include the linear demand function Qd = a − bP, the slope formula m = Δy/Δx, and the marginal cost definition MC = dTC/dQ.

The fundamental economic problem is scarcity — unlimited human wants versus limited resources — which forces every society to make choices and bear opportunity costs. The Production Possibility Curve (PPC) shows the maximum combinations of two goods an economy can produce. Resources are allocated through three questions (what, how, for whom) using different economic systems: capitalist, socialist, or mixed. Nepal follows a mixed economy.

A market is the mechanism through which buyers and sellers exchange goods and services. Markets are classified by competition into perfect competition and imperfect competition (monopoly, monopolistic competition, oligopoly). Revenue is the money a firm receives from sale: Total Revenue (TR = P×Q), Average Revenue (AR = TR/Q), and Marginal Revenue (MR = ΔTR/ΔQ). Under perfect competition AR = MR = P (horizontal line); under monopoly AR slopes downward and MR lies below AR with the same intercept and twice the slope.

Cost is the monetary expenditure incurred by a firm in producing goods. In the short run, some factors are fixed (giving Total Fixed Cost — a horizontal line) and some are variable (giving Total Variable Cost — an inverse-S shape). Total Cost = TFC + TVC. Dividing by output gives Average Fixed Cost (rectangular hyperbola), Average Variable Cost (U-shaped), and Average Total Cost (U-shaped). Marginal Cost is U-shaped and cuts both AVC and ATC at their minimum points from below.

A firm is a single producing unit; an industry is a group of firms producing homogeneous products. Equilibrium of a firm means the output at which it maximises profit. Two approaches: (1) TR-TC approach — profit is maximum where the vertical gap between TR and TC is the largest; (2) MR-MC approach — equilibrium where MR = MC and MC cuts MR from below (sufficient condition). Under perfect competition the firm is a price taker (P = AR = MR) and equilibrium is at MR = MC. Under monopoly the firm is a price maker (downward AR, MR below AR) and equilibrium is also at MR = MC but at a higher price and lower output than perfect competition.

Factor pricing determines the rewards of the four factors of production: land earns rent, labour earns wages, capital earns interest, and entrepreneurship earns profit. Rent arises from differences in fertility (Ricardian view) or as a surplus over opportunity cost (modern view). Wages are determined by productivity and labour market conditions; the subsistence theory says wages hover around subsistence level. Interest is the price of capital, determined by saving and investment (classical theory). Profit is the reward for bearing risk (Hawley) or uncertainty (Knight). Nepal examples: Terai land rent, minimum wage Rs 15,000+/month, NRB policy rate.

A bank is a financial institution that accepts deposits, grants loans, and creates credit. Nepal's banking system has four layers — central bank (NRB, established 2013 BS), commercial banks (Nabil, NIC Asia, RBB), development banks (NDBL, ADBL), and microfinance institutions. NRB issues currency, acts as banker to the government, and controls credit through monetary policy. Commercial banks create credit through the money-multiplier process. The money market deals in short-term funds (T-bills, call money); the capital market deals in long-term funds (shares, bonds). Monetary policy is expansionary (to boost growth) or contractionary (to control inflation).

Government finance (public finance) studies how the government raises revenue and spends it for public welfare. Government expenditure is classified as recurrent (salaries, interest, subsidies — recurring every year) or capital (roads, hydro, schools — creating assets). Revenue is tax-based (income tax, VAT, customs) or non-tax (fees, fines, dividends from NEA, NTC). Taxes are direct (income, wealth — burden falls on payer) or indirect (VAT, excise — burden shifted). Tax rate structures are progressive (rate rises with income), proportional (same rate), or regressive (rate falls with income). Adam Smith's four canons of taxation are equity, certainty, convenience, and economy. The government budget shows estimated revenue and expenditure — surplus (R > E), deficit (R < E), or balanced (R = E).

International trade is the exchange of goods and services between countries. It allows nations to specialise where they have comparative advantage, broadens the variety of goods available, and transmits technology. The **Balance of Trade (BOT)** records only the visible goods exported and imported; the **Balance of Payment (BOP)** records all international transactions — visible, invisible (services), capital, and official reserve. A trade deficit (imports > exports) is normal for developing countries like Nepal. The **exchange rate** is the price of one currency in terms of another — fixed (pegged by central bank) or floating (market-determined). **Free trade** opens borders; **protectionism** uses tariffs and quotas. **Ricardo's comparative advantage theory** says even if one country is more efficient in everything, both gain by specialising where their *opportunity cost* is lowest.

**Poverty** is the inability to meet basic needs — Nepal measures **absolute poverty** as living below Rs 3,222 per person per month (poverty line, NLSS 2010/11); the poverty rate fell from 42% (1995/96) to 18.7% (2022/23, NPC estimate). **Inequality** is measured by the Lorenz curve and the **Gini coefficient** (Nepal's Gini is 0.30 — moderate). **Unemployment** is when willing and able workers cannot find jobs; Nepal's unemployment rate is around 6% (NLSS), but **underemployment** in agriculture is far higher. Types of unemployment: frictional, structural, cyclical, seasonal, disguised. **Human resources** are the population equipped with education, skills and health. Nepal's **Human Development Index (HDI)** for 2023/24 is **0.602** with **rank 143 out of 193** countries — medium human development but with large gaps between provinces (Bagmati 0.632 vs Karnali 0.484).

Nepal's foreign trade has grown rapidly but is heavily skewed toward imports. In **Fiscal Year 2021/22**, total foreign trade was Rs 212,048 crore — exports Rs 20,003 crore (9.4%) and imports Rs 192,045 crore (90.6%), giving a record trade deficit of **Rs 172,042 crore**. Major exports are readymade garments, pashmina, carpets, tea, cardamom, pulses, juice, and handicrafts; major imports are petroleum, gold, iron & steel, machinery, electronics, vehicles, and food. India is the largest trading partner (about 60% of trade), followed by China, USA, UAE, and Indonesia. Nepal joined **WTO on 23 April 2004** (WTO established 1 January 1995) and **SAFTA** came into force on 1 January 2006. **Foreign employment** — Nepali workers in Gulf countries, Malaysia, Korea (EPS) — has surged since the 1990s; **remittance** in 2023/24 was Rs 1,007 billion (20.4% of GDP), the single largest source of foreign exchange and a key driver of poverty reduction.

Development planning is the deliberate attempt by the government to implement, monitor and coordinate economic decisions to achieve chosen national goals. Hugh Dalton defined it as "deliberate direction by persons in charge of large resources of economic activities towards chosen ends." Nepal began planning with the First Plan (1956) and is now implementing the Fifteenth Plan (2019/20–2023/24) with the vision "Prosperous Nepal, Happy Nepali." Plans are formulated by the National Planning Commission (NPC), forwarded to ministries, approved by the Council of Ministers, and passed by Parliament.

The Sustainable Development Goals (SDGs) are a universal agreement among UN member states — 17 goals and 169 targets — adopted in September 2015 and effective from 1 January 2016, replacing the Millennium Development Goals (2000–2015). The SDGs rest on the 5Ps: Planet, People, Prosperity, Peace, and Partnership. Nepal is committed to the 2030 Agenda and has localised the SDGs through its plans and the SDG Status Report. Nepal's poverty rate has fallen to 18.7% (2022/23), but challenges remain in hunger, quality education, gender equality and decent work.

Statistics is the science of numerical statements of facts that are capable of analysis and interpretation. In the plural sense, statistics means numerical facts (data) collected systematically for a predetermined purpose; in the singular sense, it is the science of methods and techniques of collection, presentation, analysis and interpretation of data. Statistics has four aspects — collection, organisation, analysis, and interpretation. It is widely used in economics, planning, business, state administration, natural science, social science and mathematics. Limitations: statistics does not study individuals, is not suitable for qualitative phenomena, its laws are not exact, and it can be misused.

Data are numerical facts obtained by counting or enumerating. Before collecting data the investigator must be clear about the objective, scope, source, method, units, accuracy required, and type of enquiry. There are two types of data — primary (collected for the first time by the investigator, original) and secondary (collected by someone else and used by another person). Five methods of primary data collection exist: direct personal interview, indirect oral interview, information from correspondents, mailed questionnaire, and questionnaire sent through enumerators — each with merits and demerits. Sources of secondary data are published (government reports, journals, books) and unpublished (research, records). Precautions are needed because secondary data may be biased, outdated, or unsuitable.

Microeconomics studies individual units of an economy — consumers, households, and firms — and how they make choices under scarcity. This unit covers the scope and limitations of microeconomics, business economics, the production possibility curve, marginal analysis, and Mankiw's Ten Principles of Economics.

Demand and supply are the two forces that determine price and quantity in a free market. This unit covers the laws of demand and supply, determinants, shifts vs movements along curves, market equilibrium, the effect of government policies (tax, subsidy, price control) on equilibrium, and market efficiency measured by consumer and producer surplus.

Elasticity measures how responsive quantity is to changes in price, income, or other factors. This unit covers price, income, cross, and advertisement elasticity of demand — their formulas, degrees, and uses — as well as point elasticity, the total expenditure method, and the elasticity of supply.

Consumer behaviour theory explains how a rational consumer maximises utility subject to a budget constraint. This unit covers the cardinal (utility) and ordinal (indifference curve) approaches, the law of diminishing marginal utility, consumer equilibrium under both approaches, the properties of indifference curves, and the price, income, and substitution effects.

Production is the process of transforming inputs into outputs. This unit covers total, average, and marginal product; production functions including the Cobb-Douglas function; the law of variable proportions in the short run; isoquants and the marginal rate of technical substitution; the optimal combination of inputs; and the laws of returns to scale in the long run.

A firm plays a dual role — as a producer it minimises cost, and as a seller it maximises revenue. This unit covers the cost function, various cost concepts (explicit, implicit, fixed, variable), short-run and long-run cost curves, the relationship between AC and MC, economies and diseconomies of scale, economies of scope, revenue concepts, and the relationship between price elasticity and revenue.

Product pricing theory examines how price and output are determined under different market structures. This unit covers the characteristics of perfect competition, monopoly, monopolistic competition, and oligopoly; the equilibrium of the firm under each; cartels and joint profit maximisation; and real-world pricing practices including price discrimination, cost-plus pricing, and penetration pricing.

Factor pricing deals with the determination of prices for the four factors of production — land (rent), labour (wages), capital (interest), and entrepreneurship (profit). This unit covers the concept and types of rent including the modern theory; wages and the marginal productivity theory; interest and the loanable funds and liquidity preference theories; and profit including the dynamic and innovation theories.

Macroeconomics studies the economy as a whole — total output, employment, and the price level. This unit covers the meaning, scope, uses, and limitations of macroeconomics; the difference and interdependence between micro and macro; new classical and new Keynesian schools; and key concepts like stock vs flow variables, equilibrium, and static/dynamic analysis.

National income accounting measures the total economic activity of a nation. This unit covers the circular flow of income in two-, three-, and four-sector economies; the concepts of GDP, NDP, GNP, NNP, NI, PI, DI, and PCI; real vs nominal GDP and the GDP deflator; the three measurement methods (product, income, and expenditure); difficulties in measurement; and the importance of national income accounting.

The classical theory of employment, developed by Smith, Ricardo, and Say, argues that a free-market economy automatically achieves full employment through flexible wages, prices, and interest rates. This unit covers the concept and types of unemployment, Say's law of markets and its implications, the determination of equilibrium employment and output under classical theory, and the critical evaluation that led to the Keynesian revolution.

Keynesian macroeconomics, born from the Great Depression, argues that aggregate demand determines output and employment. This unit — the largest in the course (30 LH) — covers the principle of effective demand, the consumption function and its determinants, the saving function and the paradox of thrift, the investment function and marginal efficiency of capital, income determination in a two-sector economy, and the investment multiplier.

The IS-LM model, developed by John Hicks (1937) and Alvin Hansen, extends Keynesian theory to show simultaneous equilibrium in both the product market (IS) and the money market (LM). This unit covers the derivation of the IS curve from the product market, the derivation of the LM curve from the money market, and the general equilibrium where both markets clear simultaneously — determining both income (Y) and the interest rate (r).

Inflation is a sustained rise in the general price level. This unit covers the meaning and types of inflation (demand-pull, cost-push, built-in); measurement through the Consumer Price Index (CPI); causes, effects, and anti-inflationary measures; the Phillips curve linking inflation and unemployment; and the concepts of deflation and stagflation.

Business cycles are recurring fluctuations in economic activity around the long-run growth trend. This unit covers the concept, types, and characteristics of business cycles; the four phases (peak, recession, trough, expansion); and the monetary, fiscal, and other measures used to control them.

Monetary theory examines the role of money in the economy. This unit covers the concept and determinants of money supply; the Keynesian approach to the demand for money; money and capital markets; monetary policy (concept, types, objectives, and instruments); and the determination of equilibrium exchange rates under fixed and flexible exchange rate systems.

Government finance covers how the government raises revenue and spends it to achieve macroeconomic objectives. This unit covers the government budget (concept, classification, components); deficit financing (concept, objectives, methods); and fiscal policy (concept, types, objectives, instruments) — the use of taxes and spending to influence the economy.

This unit — the second largest (25 LH) — covers six major contemporary macroeconomic issues relevant to Nepal: privatisation, liberalisation, and globalisation; foreign direct investment; economic growth and development; foreign employment; poverty; and economic inequality. Each topic covers concepts, causes, current status in Nepal, and remedies.