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By the end of this section, you will be able to:

  • Explain how banks act as intermediaries between savers and borrowers
  • Evaluate the relationship between banks, savings and loans, and credit unions
  • Analyze the causes of bankruptcy and recessions

The late bank robber named Willie Sutton was once asked why he robbed banks. He answered: “That’s where the money is.” While this may have been true at one time, from the perspective of modern economists, Sutton is both right and wrong. He is wrong because the overwhelming majority of money in the economy is not in the form of currency sitting in vaults or drawers at banks, waiting for a robber to appear. Most money is in the form of bank accounts, which exist only as electronic records on computers. From a broader perspective, however, the bank robber was more right than he may have known. Banking is intimately interconnected with money and consequently, with the broader economy.

Banks make it far easier for a complex economy to carry out the extraordinary range of transactions that occur in goods, labor, and financial capital markets. Imagine for a moment what the economy would be like if all payments had to be made in cash. When shopping for a large purchase or going on vacation you might need to carry hundreds of dollars in a pocket or purse. Even small businesses would need stockpiles of cash to pay workers and to purchase supplies. A bank allows people and businesses to store this money in either a checking account or savings account, for example, and then withdraw this money as needed through the use of a direct withdrawal, writing a check, or using a debit card.

Banks are a critical intermediary in what is called the payment system    , which helps an economy exchange goods and services for money or other financial assets. Also, those with extra money that they would like to save can store their money in a bank rather than look for an individual that is willing to borrow it from them and then repay them at a later date. Those who want to borrow money can go directly to a bank rather than trying to find someone to lend them cash Transaction costs are the costs associated with finding a lender or a borrower for this money. Thus, banks lower transactions costs and act as financial intermediaries—they bring savers and borrowers together. Along with making transactions much safer and easier, banks also play a key role in the creation of money.

Banks as financial intermediaries

An “intermediary” is one who stands between two other parties. Banks are a financial intermediary    —that is, an institution that operates between a saver who deposits money in a bank and a borrower who receives a loan from that bank. Financial intermediaries include other institutions in the financial market such as insurance companies and pension funds, but they will not be included in this discussion because they are not considered to be depository institutions , which are institutions that accept money deposits and then use these to make loans. All the funds deposited are mingled in one big pool, which is then loaned out. [link] illustrates the position of banks as financial intermediaries, with deposits flowing into a bank and loans flowing out. Of course, when banks make loans to firms, the banks will try to funnel financial capital to healthy businesses that have good prospects for repaying the loans, not to firms that are suffering losses and may be unable to repay.

Questions & Answers

what is economics
Sarfo Reply
balance of trade
Sarfo
then what's the meaning of Demand
Sammy Reply
boss wetin you dey do for here Sammie rose
adedokun
what is probability
mohamed Reply
state the law of demand
onu Reply
law of demand states that the higher the price the lower the quantity demanded and vice versa in propotiona to varieties of commodity
oloja
proportion of*
oloja
The law states that all other things being equal at higher price less commodity demanded and at lower price more commodity demanded
Eliah
thanks
onu
it states that the higher the price,the lower the quantity demanded and the lower price,the higher quantity demanded
Akale
what is scarcity
Wireko Reply
what are some the problems of scarcity
Wireko
The economic problem of sacrtiy only be solved if there is an economic efficiency
Shoaib
inflation
Suleman
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Okwori
Scarcity is an economic good that is limited in supply.
tomi
inflation
Spark
Rise in gernal price level from previous year
Shoaib
it is the limited supply of resources
Abdul
Scarcity is the limitedness in supply in relation to the commodity under consideration
Ayiku
who is the father of economics
Acquah Reply
Adam Smith...
Chris
adam smith father of modern economics alfred Marshall father of micro economics john Maynard Keynes father of macro economics
vinay
Adam smith
Esther
Adam smith is the father of classical economics.
yusuf
david recardo
Tariku
Admin smith
Shoaib
The economic field existed because of the limited resources and unlimited human wants. why is it so?
Eliud Reply
state the law of diminish return
Abobarin
the law of diminishing returns states that every additional increase in the variable factor of production, keeping other factors fixed, will eventually reach a point were returns will diminish with every successive unit of factor added.
Hamna
who is the father of Ethiopian Economics?
Tariku
the system of economics
molos Reply
what is economics system
molos
is an arrangement for managing the relatively scarce resources in a particular place and at a particular time
Samuel
but also allocate resources equally ?
Furkan
economic is the study of what
Abba
Economics is a science which studies humam behaviour as a relationship between ends and scarce means which have alternate uses
Samuel
what is the law of equilibrium.
Henry Reply
The law of equilibrium states that when the demand of a commodity is equal to the supply
Stanley
what is demand curve
Gift
demand carve is a graphical representation of the relationship between the price of the or the service and the quantity demanded for a given period of time
Adamsvictor
Is the graphical representation of demand schedule. Also it has negative slope
Abubakary
The law of equilibrium is state that the quantity demand are equal to quantity supply.
Abubakary
sometimes demand exceeds supply or vice versa .In the first situation prices tend to rise therefore supply and demand meet the balance point called as equilibrium .
Furkan
the point of intersection mathematically but this is just an assumption that all other variables remain equal
Deleon
when there is excess supply and demand it means there is forces acting upon the equilibrium and prices should be decreased or increased appropriately
Deleon
The law of equilibrium states that ceteris paribus, at a certain two variables will be equal to each other.
Sessay
scarcity is the wants and desire of people of goods and services with limited resources and purchasing power to get it all
adedokun
The difference between cyclical unemployment and structural unemployment
Prince Reply
Cyclical unemployment .it has to do with an increase in the quantity of good demanded or there is over production which result in fall in prices. Industries will be affected it will now causes retrenchment of workers in the industries while structural unemployment arises as a result of slight change
Adeoti
In the industrial structure of a countries workers wil now be retren
Adeoti
Will now be retrenched as a result of economic recession... That is the little i knw....
Adeoti
what is the condition of a consumer behaviour in the equilibrium under the theory of consumer behaviour
Sahr Reply
what is equilibrium
Sahr
A point where quantity demand & supply meets called equilibrium
Hasham
a state is said to be equilibrium when there is no tendency of movement.
Nibedita
Pls @Nibedita am confused
Prince
The state of balance achieved by an end user of products that refers to the amount of goods and services they can purchase given their present level of income and the current level of prices. Consumer equilibrium allows a consumer to obtain the most satisfaction possible from their income.
Okwori
where is the calculations?
Nathan Reply
what are the two conditions for aconsumer to be in the equilibrium under the theory of consumer behaviour in
Sahr
Economic equilibrium is a condition or state in which economic forces are balanced. In effect, economic variables remain unchanged from their equilibrium values in the absence of external influences. Economic equilibrium may also be defined as the point at which supply equals demand for a product,
vinay
Hello there, let's make a time to chat about econimics and its issues.
DA Reply
it's true
Adamsvictor
hie Sir /Madam l need help when it comes to Economics lm doing it for the first time
Thembelani
So, share your problems that you have in terms of economis and we will discuss on it.
DA
Basic Economic problems
Thembelani
what is the Basic Economic problem
Thembelani
what is the Basic Economic problem
Thembelani Reply
scarcity
Rhaiymornd
a bit of explanation please its my first year doing Economics
Thembelani
rare, limited. economic agents eg You dube, the govt & the business entities wants to maximise their utility/satisfaction but because limited resource or scarcity of such resources they are unable to satisfy their needs.
ian
thank u Sir , l understand what you are saying now
Thembelani
limited resources; you wanna take the most benefits from the minimum resource.
DA
if u ar a fresher, eco has to 2 fundamental parts "micro & macro". micro(small) this is were the economc agents ar discussd, economc systms, dmand & supply, typs of market systms etc and the macro (big) part the elucidates the functns of central bank, typs of employmnt, functns of money & int trade.
ian
there is an old adage that says "a picture is worth a thousand words" economics is full of graphing so it requires on the side of the student to master the art of keeping information in form graphs.
ian
oky Sir
Thembelani
scarcity becomes the fundamental problem of economics because of limited resources, when we take an individual, he or she has many wants, thus unlimited wants but can never satisfy all but only few.
Rhaiymornd
now when we take a firm, a firm maybe willing to produce two or more product into the market but due to limited resources they only produce one. the same way if we take the government, he or she maybe willing to bring development either through infrastructures,
Rhaiymornd
that is when consumer decision making rule comes in
Olusegun
choice arises as a result of scarcity of resources
Olusegun
so if we look through, the individual, firm and government, their wants are unlimited but due limited resources, all of their wants cannot be satisfy. therefore scarcity can be term as limited in supply of resources. scarcity is not lack of resources but insufficient resources
Rhaiymornd
there is a marriage with the following; scarcity, factors of production, opportunity cost curve (occ) or (ppc, ppf, tc) production possibility curve productn possibility frontier transformation curve. The OCC, PPC, PPF & TC explains the decisions made by householders, firms & the govt.
ian
opportunity cost also arises as a result of firm willing to produce a particular commodity but resources use in satisfying or producing such output is limited
Olusegun
wat ar those decisions? the most important is WHY nations economise tht is if they hav abundancy of factors of productn eg land, labour & entreprise? now since all of us have unlimited needs against few resourcs PPC, PPF, TC, OCC walks in to make wise allocatn of resources.
ian
how do those decisions made? eg by economic agents; a. Household (You) - if u have R10 & wish to buy a book & a pen & realise that both commodities seĺl at the same price which of the two (2) can u buy (necesity) and which one can u forgo (not all tht important).
ian
b. firms - they allocat mo resourcs to all thoz commoditz tht they think will yield mo profit. c. Govt - if the govt SA was to come in yo area which 1 would u think they can consider first tht can benefit the majority & the minority. So instead of building football stadium they construct a hospital.
ian
if the SA govt had enough resources they would have built both the stadium and the hospital but because of scarce in terms of resources they had to forgo the construction the stadium to build a hospital which is necessary for the majority to benefit.
ian
Opportunity cost well broken down..
Andres
opportunity cost means the lose of other alternatives when the alternative is chosen
saad Reply
is the benefits that you loose by not selecting a certain alternative.
EDWINY
individual wants maybe unlimited, but means to satisfy them are limited there one has to forgo some alternative in order to acquire other alternative and it must according priority, that is when scale of preference set in for individuals to make choice
Rhaiymornd
hello everyone
Aliyu
Next best alternative forgiven
Shoaib

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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