Economics in Financial institutions

In this article, let’s peep into the Banking Sector & see few economic concepts which can be applied to the banks.

1)      Economies of Scale: The more the number of customers who avail the services, the average costs of service are spread across all the customers. Here the change in number of customers results in change in the average costs of service. This is known as Economies of scale.

2)      Economies of Scope: Banks provide insurance policies, mortgaging, locker services along with its main operations in the same premises. Thus getting benefited by the same location.

3)      Monopolistic competition: The nature of services provided by various banks are heterogeneous (i.e., different from each other). As each of the bank has different schemes & services for the customers though the basic services of bank remain same. The freedom of entry in this sector is unrestricted. Therefore, we can classify this to be a monopolistic competition.

4)      Law of demand: In general, we can see this in banks that with the increase in interest rates of loans, the demand for borrowings from banks decreases & vice versa in case of decrease in interest rates.

5)      Opportunity cost: Customers being rational people check their opportunity cost before depositing the money in fixed deposits with other alternatives like stock market/mutual funds, etc., & take decisions using the concept of Opportunity cost.