Apply Economic principles to work in financial services industry Unit Code: FNSINC601

Oyunsuvd Amgalan Student ID: 201800157

4.1 Written Activity

Task 1:

Question 1

Outline key features of common economic theories that relate to the financial services industry.

There are three main economics related to the financial services industry.

 Classical Economics – If there is a change in the supply or demand curve in the goods market,
then prices adjust in order to bring the goods market to an equilibrium. Also, if there is a change
in the supply and demand of labor then wages adjust in order to bring the labor market to an
equilibrium.
 Keynesian Economics – This economics assumes that the economy has an unutilized excess
productive capacity by implication, it is possible to add to output and employment without for
adding to fixed productive resources.
 Supply Side Economics –Modern supply side economics lays emphasis on providing all types of
economic incentives to raise aggregate supply in the economy.

Question 2

Outline key features of microeconomic principles and how they relate to financial services industry
products, services and organizational practices.

The following are the key features of microeconomics:

 Demand, supply and equilibrium – Demand defines consumer’s need of a particular product or
service; Supply means how many products and how much should it cost in order to reach
customers; when consumer demand equals to supplier’s supply it means equilibrium;

 Measurement of elasticities – Elasticity is one of the economic concepts which measures

reactions of one variable change into another variable.

 Consumer demand theory – which is a theory that tries to show how consumers decides at the
individual level.

 Theory of production – it attempts to explain the fundamentals by business firm makes

decisions on how much of each commodity that it sells and it will manufacture etc.

 Costs of production – it tries to predict how much will be the cost of overall production process.

 Opportunity cost – this is other choice when another one choice was chosen. (Given up
alternative)
Apply Economic principles to work in financial services industry Unit Code: FNSINC601
Oyunsuvd Amgalan Student ID: 201800157

 Market structure –which is a structure of market when it is described as best. We should take
account into share of other existing firms in a same industry.

Question 3

Explain capital adequacy requirements for financial services organizations based on financial product
mix.

Capital requirement is the amount of capital a bank or other financial institution has to hold as required
by its financial regulator. This is usually expressed as a capital adequacy ratio of equity that must be held
as a percentage of risk weighted assets. Therefore, capital requirements govern the ratio of equity to
debt, recorded on the liabilities and equity side of a firm’s balance sheet.

Question 4

Explain asset pricing models and their use in identifying organizational value and capital structures.

The capital asset pricing model is a model that describes the relationship between systematic risk and
expected return for assets, particularly stocks. CAPM is widely used throughout finance for the pricing of
risk securities, generating expected returns for assets given the risk of those assets and calculating costs
of capital.

Question 5

Explain and apply economic theories and valuation of assets

The reason of assets’ revaluation is to understand between price and value. Price is what you pay the
vendor. Value is what your asset is worth and can be accurately assessed by a competent and qualified
value. The other reason is to guide your investment decisions. Investment is one of the biggest decisions
for company.

Question 6

Identify and apply financial modelling techniques and tools

 Compound interest –It is the addition of interest to the principal sum of a loan or deposit, or in
other words, interest on interest. It is the result of reinvesting interest, rather than paying it out,
so that interest in the next period is then earned on the principal sum plus previously
accumulated interest.
 Net Present Value – NPV is the difference between the present value of cash inflows and the
present value of cash outflows over period of time. NPV is also used in capital budgeting to
analyze the profitability of a projected investment or project.
 Internal Rate of return – IRR is metric used in capital budgeting to estimate the profitability of
potential investments. Internal rate of return is a discount rate that makes the net present value
of all cash flows from a particular project equal zero. IRR calculations rely on the same formula
as NPV does.
Apply Economic principles to work in financial services industry Unit Code: FNSINC601
Oyunsuvd Amgalan Student ID: 201800157

Question 7

Outline industry or organization financial markets, products and services

 Bank industry:
- Checking accounts which is a deposit account at bank that enables withdrawals and
deposits.
- Savings accounts which is an account at a bank which generates interests due to giving
money to safe hand of financial institution.
- Debit and credit cards those are for putting income into bank account or borrowing money
from bank.
- Merchant services which are credit card processing, reconciliation and reporting and
checking collections etc.
- Cash management which is about payroll services and deposit services etc.

Question 8

Describe key features of relevant legislation, statutory requirements and industry codes of practice

 Banking industry – Bank regulation is a form of government regulation which subjects banks
to certain requirements, restrictions and guidelines, designed to create market transparency
between banking institutions and the individuals and corporations with whom they business
among other things.
 Insurance industry – There are two key regulators are the Australian Prudential Regulation
Authority (APRA) and the Australian Securities and Investment Commission (ASIC). APRA
sets prudential standards for the general insurance industry. For example, it determines
how much capital an insurer must hold in reserve to pay claims, and this in turn can have a
significant impact on the premium an insurer must charge.

Question 9

Identify and describe techniques and tools for evaluation and interpretation of research data

 Sampling differences – S&P, Case-Shiller is broader as it includes both conforming and jumbo
loans in the index; FHFA only includes conforming loans which mean that it excludes the high
end of the market.
 Geographical coverage and frequency - the FHFA indexes include data from all fifty states and
data are published at the state level. The – S&P, Case-Shiller indexes include quarterly indexes
for 20 metropolitan areas.

Question 10

Describe the economic and political climate relating to the financial services industry

Current economic and political situation in Australia relating to banking industry:

Apply Economic principles to work in financial services industry Unit Code: FNSINC601
Oyunsuvd Amgalan Student ID: 201800157

The Australian economy experienced 26 years of uninterrupted economic growth, holding one of the
highest growth rates of the developed world and being the world’s 13 the largest economy. The IMF has
estimated Australia’s GDP growth to 2.2% in 2017. This decrease is partially due to bad weather which
slowed housing investments and mining exports as it temporarily disrupted coal transportation. The
economy continues to be driven by business and government spending, while households and the
consumer sector struggle amid low wages growth. The country also benefits from large-scale exports of
agricultural products and a rigorous financial sector.

4.2 Observation/ Practical Activity

Q#1

Suppose the price elasticity of demand for Ferrari vehicles is elastic. If Ferrari wish to increase revenue
from vehicle sales, would you recommend it to increase or decrease price, ignoring the cost of
production? What effect would your answer have on Ferrari’s brand?

First of all, demand elasticity is a ratio or comparison between the relative changes in the
number of items requested and the relative changes in prices. Price elasticity of demand for Ferrari
vehicles is elastic. This means that consumers are very responsive to price changes. If there is a change
in price, it is very small and will affect the demand for Ferrari vehicles on the market.

Therefore, if Ferrari companies want to increase revenue from vehicle sales amid the price
elasticity of demand, I would strongly suggest that Ferrari vehicle companies reduce the price of Ferrari
cars. However, on the other hand, it will affect the brand identity in negative way. But by lowering
prices, consumers might think again to buy Ferrari cars and it will certainly affect the company’s benefit.

Q#2

In Australia, a large amount of pollution is emitted into the air by companies that process iron ore.
You are the advisor to the Australian Environmental Protection Agency. Suggest two ways in which
the agency can deal with this statement?

The iron and steel industry is undoubtedly one of the most important foundations of any industrial
economy. However, this industry is also a significant contributor to environmental pollution. The
iron and steel industry has a significant impact on the global environment. Producing steel
requires the use of large amounts of energy and minerals as well as extensive mining and waste
disposal areas. As a result, steel production produces large amounts of air pollutants solid and
residual by-products and waste water sludge. Pollution can take many forms and impacts not
only occur in the local area but they can spread to regional or global scales including through
atmospheric pollution. In need of improvement, industry is more concerned about the
environment. There are two agencies that can be invited to work together to voice and
campaign for air pollution. So that the related industries pay more attention to the disposal of
pollutant waste and can reduce the pollution that has occurred. The first agency is
WebALive.com which is located in Melbourne and it is one of the global pioneers in making
Apply Economic principles to work in financial services industry Unit Code: FNSINC601
Oyunsuvd Amgalan Student ID: 201800157

online technology more accessible with DIY WebConsole and Webcommerce website platform.
The second agency is Statista which is main provider of markets and consumer data. More than
five hundred visionaries, experts and actors are constantly rediscovering Statista, so they
continue to develop new products and successful business models. Statista is located in Brahms
Contractor and it was a large advertising agency and was able to work on projects on demand.
Appeal for environmentally friendly industries is very appropriate for both of these websites.
With this, environmentally friendly community more concerned about the environment and
start doing environmentally friendly industry movements.

Q#3

At times when prices for certain fresh fruits such as bananas are very high, some consumers argue
that the fruit growers are ripping them off. Using economics principles, state what’s wrong with this
statement?

Prices of certain fresh fruits such as bananas are very high. This raises prejudices in the community that
farmers commit fraud in pricing. Of course we know that farmers need money to maintain the everyday
process of planting. Farmers need fertilizer, water, maintenance, purchasing seeds and many more. In
addition to that, the process of fruiting plants also has its own period does not bear fruit every day. So
that, there are certain times that become the harvest season of fruits. Farmers cannot always meet the
needs of existing fruit in the market to meet consumer needs. Availability of goods and market demand
will certainly affect the price of goods in the market. As consumers, they will not think about what the
farmers have gone through in providing demand. Consumers only want to understand what is
experienced by farmers. Not to mention, the presence of imported fruits that are competing in the
market, makes fruit farmers struggle to sell their fruits and compete in prices on the market. Based on
the statement sometimes when the price of certain fresh fruits such as bananas is very high some
consumers argue that fruit farmers rip them off. The statement given by consumers that fruit farmers
tear it is a wrong opinion. This is because farmers have set prices based on prices in the market and
based on the results of the analysis of the costs principles, namely economic principles in production
activities, economic principles in distribution activities and economic principles in consumption
activities.

4.3 Written/ Verbal Activity

Question 1

What steps would you take to identify economic principles and theories related to financial services
functions and tasks?

 Banking industry –In the banking industry use three economic principles in carrying out the
functions and duties:
- The principles of economics I production activities – producing as many as goods and
services as possible with the cost of production and certain sacrifices;
Apply Economic principles to work in financial services industry Unit Code: FNSINC601
Oyunsuvd Amgalan Student ID: 201800157

- Economic principles in distribution activities – systems ad activities for distributing goods

and services from producers to consumers;
- The principles of economics in consumption activities –Is the effort to obtain maximum
satisfaction from an item or service with sacrifice and use of certain budget.
 Insurance industry –The insurance industry uses three economic principles related to financial
functions and services:
- The principles of economics I production activities – producing as many as goods and
services as possible with the cost of production and certain sacrifices;
- Economic principles in distribution activities – systems ad activities for distributing goods
and services from producers to consumers;
- The principles of economics in consumption activities –Is the effort to obtain maximum
satisfaction from an item or service with sacrifice and use of certain budget.

Question 2

How would you evaluate economic aspects that apply to decision making?

Decision making is necessary to pay attention to the effects that will be caused both positive and
negative. The following are the list of things to take account:

 Benefits obtained from decisions taken both economically and socially;

 Linking decisions with the local economy and regional or regional good;
 Possible impacts of these decisions both positive and negative impacts;
 Linkage of decisions taken with regulation, control and economic use of natural resources;

Question 3

What would you do to review your own work?

 Evaluation – evaluate your work performance in understanding economic principles in the

finance industry. So, things can be done in evaluating personal work performance in
understanding economic principles is by assessing or re-analyzing the work that has been done
based on economic principles.
 Give feedback- Seek feedback of others on your work performance in the application of
economic principles in the finance industry. It is necessary to re-understand economic principles
in the financial industry, exposure of functions and services that have been reflected.

Question 4

How will you maintain a personal understanding of economic policies?

To maintain up to date in understanding economic policy principles, it is necessary to seek more

information about economic policies and principles and make it a summary so that it can be a concepts
that can be understood personally. In addition, it is crucial to keep abreast of current economic
developments, by analyzing economic developments with understood economic policies and principles.

Question 5
Apply Economic principles to work in financial services industry Unit Code: FNSINC601
Oyunsuvd Amgalan Student ID: 201800157

Briefly describe positive economics.

A positive economy can be a positive statement or analysis. Positive economics explains things that are
in accordance with the facts and situations in the world of the economy that are happening and that will
happen. So, a positive approach relates to actual explanations and predictions. Thus, this leads to
analysis and empirical evidence, because the truth in a positive statement can be directly seen or proven
through the actual event.

Question 6

What is microeconomics?

Microeconomics is a branch of economics that analyzes small parts of overall economic activity.
Economics actors in microeconomics include:

 Households;
 Corporate individuals;
 Suppliers;
 Consumers;

Question 7

What is NPV and how do you calculate it?

NPV stands for Net Profit Value which is calculated for projecting the future new profit on an investment
at the current time.

Question 8

What is IRR? Briefly describe.

IRR stands for internal rate of return, which is an investment calculation method by calculating the
interest rate which equates the present value of investment with the present value of future cash
receipts.
Apply Economic principles to work in financial services industry Unit Code: FNSINC601
Oyunsuvd Amgalan Student ID: 201800157

Question 9

What are cost and benefit analysis?

The cost and benefit analysis is an approach that allows analysts to provide policy recommendations
based on results and evaluations of total social costs and social benefit analysis are:

 Identifying relevant impacts, identifying which things are relevant to the impact of the policy.
 Monetizing impacts and measuring the extent to which the costs incurred provide reasonable
compensation with the results obtained.
 Discounting for time and risk, calculating the estimated value of today from the costs and
benefits that will be obtained in the future. The discount factor is based on the assumption that
the value of money in the future in the flow of costs and benefits is not the same every year.
 Choosing among policies;

Question 10

What are economic models? Briefly describe.

The economic model is a circular flow of economic activity which shows the basic economic
relationships within a market economy. The circular flow model shows where money goes and what it’s
exchanged for. The model includes households, businesses and governments. We also have the banking
system that facilitates the exchange of money.

Question 11

Briefly explain modern capitalism.

The modern capitalism is a system of economic organizations characterized by private property rights
over the means of production, industry and distribution and their use to achieve profits in very
competitive conditions. An important characteristic of modern capitalism is trade, industry and
production carried out by private owners, not the government.

Question 12

Briefly describe the value theory.

There are two types of value theories:

Apply Economic principles to work in financial services industry Unit Code: FNSINC601
Oyunsuvd Amgalan Student ID: 201800157

 Intrinsic theory of value- which is the theory that values objects, goods and services. This can be
used using the size, process and costs involved in the process.
 Labor theory of value – which is the theory that states the value of an item is determined by the
amount of energy used to produce it with the understanding of offering the other means of
production are calculated as producing labor.