This document provides an overview of key concepts in economics and finance including income, expenditure, savings, factors of production, GDP, time value of money, compounding, discounting, CAGR, taxation, and factors that influence investment decision making. It defines important terms and provides examples to illustrate concepts like compound interest calculations. The document discusses both macro-environment factors like demographics, technology, politics, and the economy and micro-environment factors specific to an individual like desires, disposable income, and financial goals that influence investment decisions.

1. FINANCIAL EDUCATION AND INVESTMENT
AWARENESS
 Unit – 1: Basics of Economics
Introduction, Key Economics Terms: Income,
Expenditure, Savings, Factors of Production, Gross
Domestic Product ( GDP), Time Value of Money,
Compounding & Discounting, CAGR, Taxation –
Direct & Indirect
Factors influencing Decision Making in
Investments
Macro- Environment Factors
Micro – Environment Factors

2. INTRODUCTION
 The word “ Economics” is derived from the ancient
Greek word “oikonomikos” it means “The task of
managing a household”
 Adam smith defined economics as “ An enquiry
into the nature and causes of the wealth of
nations”
 British economist Alfred Marshall defined
Economics as “The study of man in the ordinary
business of life”

3. INTRODUCTION
 According to Paul Samuelson “Economics is the
study of how people and society choose, with
or without use of money, to employ scare
productive resources which could have
alternative uses, to produce various
commodities over time and distribute them for
consumption now and in the future among
various persons and groups of society”.

4. KEY ECONOMIC TERMS
 Income:
 Simple terms – Income refers to the money that a
person or entity receives in exchange for their
labour or products.
 For Business – Income refers to the revenue a
business earns from selling its goods and services
 For Individual – Income refers to the compensation
received for their work, services or investment.
 Income Examples: Wages, Salaries, Commission,
Revenue, Interest, Investment Returns, Government
Pension, etc.

5. EXPENDITURE
 In Normal terms – an expenditure (or Expense) is
referred to as the act of spending time, energy, or
money on something.
 in Economics – It means money spent on purchasing
goods or services.
 For Business – An expense is the cost of operations
that a company incurs to generate revenue or
income.
 Examples: Payment of wages, factory & office exp,
advertising exp,

6. CLASSIFICATION OF EXPENSES
Parameter Revenue Expenses Capital Expenses
Meaning Revenue expenses
refers to the
expenditure that does
not create any assets
Capital expense refers
to the expenditure that
creates an asset
Nature Regular and Recurring Irregular and non -
recurring
Term Usually short - term Long - term
Example Payment of salaries,
maintenance of
machinery
Purchase of
machinery

7. SAVINGS
 In the simplest form of understanding – Savings
refers to an individual’s unspent earnings.
 It is the amount that remains after meeting the
household and other personal expenses over a
given period.
 In other words – Savings is the portion of
income not spent on current expenditure. It is
the money set aside for future use and not
spent immediately.


8. WHY SHOULD WE SAVE MONEY?
 Savings can be used to accomplish goals/
objectives in the short term
 Buying a mobile phone, buying books, paying
education fees
 Saving money can also help us cover unexpected
expenses such as illness, make an emergency trip,
 Saving is good practice, not only for individual,
households, business, but also for nation’s
economy as a whole

9. FACTORS OF PRODUCTION
 Meaning: Factors of production are resources that are
the building blocks of the economy; they are what
people use to produce goods and services.
 Four factors of Productions
 Land: it includes anything that is considered a natural
resources. Ex: Land yields – oil, coal, timber, gold
 Labour: Labour is the effort that people contribute to
the production of goods and services.
 Capital: Capital refers to money that is used to produce
goods or services.
 Entrepreneurship: Entrepreneurship refers to details
an individual’s ideas, concepts, and emotional efforts to
produce a product or services

10. GROSS DOMESTIC PRODUCT (GDP)
 GDP is a common economic term in the context of
measuring the growth of an economy.
 GDP measures the monetary value of final goods and
services that is those that are bought by the final user.
 Formula for calculating GDP by Expenditure Method
GDP = C + G + I + NX
Where
C = Consumption Expenditure
G = Government Expenditure
I = Investments
NX = Net Exports ( Exports – Imports)

11. TIME VALUE OF MONEY
 The money available at the present is worth more than
the same amount in the future.
 Rs. 1000 available now is not equivalent to Rs. 1000
received after a year. The value associated with the
same sum of money received at various points on the
timeline is called the time value of money.
 Discounting is a way to compute the present value of
future money.
 Compounding is used to know the future value of
present money
 Discount Rate: Future inflows are discounted by a
relevant to reach their present value (PV).
 Compound Rate: Present inflows are increased at a
relevant rate to reach their future values (FV).

12. COMPOUND INTEREST
 A = P { 1 + (R/100) }N
Where
A = Amount at the end of the period when interest is
compounded annually
P = Principal at the beginning of the period (Original
investment amount)
R = Rate of interest
N = No of periods
Compound Interest = A - P

13. PROBLEM 1
 What is compound interest (CI) on Rs. 10,000 for 2
years at 10% per annum compounded annually.
Solution: Principal Amount = 10,000, Rat of Interest 10%,
Year = 2 years
A = P { 1 + (R/100) }N
= 10,000 { 1 + (10/100) }2
= 10,000 { 1 + (0.1) }2
= 10,000 { 1.1 }2
= 10,000 { 1.1 x 1.1 }
= 10,000 x 1.21
A = 12,100
CI = A – P
= 12100-10,000
CI = 2100

14. PROBLEM - 2
 Find the compound interest (CI) on Rs. 12600 for 2
years at 10% per annum compounded annually.
Solution: Principal amount = 12,600, Rate of Interest =
10, Number of years = 2
A = P { 1 + (R/100) }N
= 12,600 {1 + 10/100}2
= 12,600 { 1 + 0.1 }2
= 12,600{ 1.1}2
= 12,600 x 1.21
A= 15,246
CI = A – P
CI = 15,246 – 12,600
CI = 2646

15. PROBLEM - 3
 Find out the total amount payable after 2 years on
loan amount of Rs. 6000 at compound interest 9%.

16. THE RULE OF 72
 The rule of 72 is a simple way to determine how
long an investment will take to double given a fixed
annual rate of interest.
 t = 72/r
 Where
 t = Number of years required to double the
investment
 r = rate of interest

17. PROBLEM
 If you invest Rs. 1,00,000 at an interest rate 8 %
p.a compounded annually, how many years will it
take for the investment to double?
 Solution:
 t = 72/r
 = 72/8
 = 9 Years

18. CAGR – COMPOUNDED ANNUAL GROWTH
RATE
 CAGR is used to measure the rate of return for an
investment over a long period of time.
 CAGR provides you with the investment value if it
produced steady annual returns.
End Value = Investment + Return
Beginning Value = Investment
n = Number of Years

19. TAXATION – DIRECT AND INDIRECT
 Taxation is financial obligation imposed by the
government on its citizen or residents
 Direct Taxes: Direct taxes are levied on taxable
income earned by individual and corporate entities.
Ex: Income tax
 Indirect Taxes: Indirect taxes are levied on the
sale of goods and services. Ex: Goods and service
Tax, Customs duty, VAT, Property Tax

20. FACTORS INFLUENCING DECISION MAKING IN
INVESTMENTS
 Macro – Environment
 Micro – Environment
 Macro Environment: Environment which affects
the operations of all existing business entities.
 Micro Environment: Environment which
influences the functionality of a particular business
itself

21. MACRO ENVIRONMENT
 1. Demographic Factors: Demographic factors
refers to age, language, lifestyle, income
distribution, cultural differences, financial literacy
 2. Technology Factors: Technology growth and
advancement within a nation influences the
production and sale of goods - Innovation, internet
facility, are some technology factors
 3. Natural and Physical factors: Business
performance depends on various geographical and
ecological forces – availability of natural resource,
climate change, weather conditions, pollution etc

22. MACRO ENVIRONMENT
 4. Political and legal factors: The government
imposes various regulations on business –
employment laws, import/export laws, copyright
laws, labour laws, health and safety laws,
 5. Social and cultural factors: A business needs
to be socially responsible and culturally aware –
beliefs, values, social status, buying habits, religion.
 6. Economic Factors: Consumer buying decisions
are significantly impacted by macro-economic
factors – demand, supply. Inflation, interest rate,
exchange rate, recession

23. MACRO ENVIRONMENT
 7. Inflation: Inflation is the rate of increase in
prices over a given period of time, Inflation is
typically measure overall increase in prices or
increase in the cost of living in a country. – Whole
sale price index, Consumer price index
 8. Interest Rate: Interest as the money amount
charged by a lender to the borrower for the loan. Or
amount of money earned by depositing the money
in the bank- Repo rate, CRR, SLR, Bank Rate

24. MICRO ENVIRONMENT FACTORS
 The micro environment of the organisation consists of
those elements which are controlled by the
management.
 Some of the key micro- environment business factors
are 1) Customers 2) Suppliers 3) Competitors 4) the
general public
 When it comes to investment decisions – Micro factors
are focussed on the individual’s attributes
 1) Desire, want and demand
 2) Disposable Personal Income
 3) Financial goals and their timing

25. MICRO ENVIRONMENT FACTORS
 1. Desire, want and demand –
 Desire refers to the ambition or aspiration of a
person.
 Want is a strong feeling,
 Demand refers to ability to purchase that
commodity at a given price.
 2. Disposable Personal Income: Disposable
Personal Income (DPI) is defined as the amount of
money that an individual or household has to spend
or save after income taxes have been deducted.

26. MICRO ENVIRONMENT FACTORS
 3. Financial goals and timing: Financial goals
helpful to visualize how you want to handle your
finances for your personal interest
 Financial Goals can help you to identify areas of
your life where you want to monitor your spending.

27. TEST YOUR UNDERSTANDING
 1. Which of these is not considered as a
technological factor the macro – environment
factors?
A) Wireless charging
B) Engine efficiency
C) Security in cryptography
D) None of these
Ans: None of these

28. TEST YOUR UNDERSTANDING
 2. Bank rate is the rate at which banks can borrow
money from RBI without any collateral.
A) True
B) False
Ans: True

29. TEST YOUR UNDERSTANDING
 3. Customs duty comes under which type of tax in
India?
A) Direct Tax
B) Indirect Tax
C) Provisional Tax
D) All of the above
Ans: Indirect Tax