Basic Concept of Economic – You must know
Like all other subjects, Economics also has its own terms and concepts. This article will give a view of some elementary concepts which are frequently used in economic analysis. Wants, utility, price, value, wealth, welfare, money, market, investment, income, production, consumption and savings are some of the concepts not only used in economics book but also in real life.
The word ‘want’ ordinarily means a wish or desire for something. It can be said that the words want and desire are synonymous in sense. But in economics we use the words in two different senses. ‘Desire is the wish to have something. But ‘want’ is an effective desire for a particular thing and can be achieved only after an effort. To have a Honda City car, is my desire but it would become my want only if I am ready to make an effort, i.e. to make an earning, to buy the car.
Human Wants are classified into:-
- Primary Wants refer to wants for those goods which are essential for the existence of human life and also for the normal maintenance of the life. Food, clothing and shelter are the essential wants for maintaining life.
- Secondary Wants refer to wants for those goods which provide comforts and luxuries of life. Goods like a sofa set, a music system, a refrigerator or a cooler in the bedroom are source of comfort. Where as a costly house, expensive jewellery, expensive cars or air conditioners are examples of luxuries.
Features of Human Wants:-
- Wants Are Unlimited—Wants begin since a child is born and continue till he goes to the graveyard. So it can be said that human want is endless and are therefore it is unlimited.
- Wants Are Complementary—When two or more goods are wanted together, the want for these goods is said to be complementary. The want for a car is complementary to the want for petrol.
- Wants Are Competitive—As man has limited income, therefore he can purchase only one commodity at a time. For example if a student has Rs. 500 with him, he can spend it in a restaurant or see a movie or can watch a cricket match. Thus there is a competition among these three wants.
- Wants Multiply—Human wants multiply with time.
- A Single Want Can Be Satisfied—As the resources are insufficient to satisfy all the wants simultaneously, a single want can be satisfied.
- Wants Differ in Their Urgency—Human wants differ in their urgency. Some wants are more urgent while others are less pressing.
- Substitution of wants—A particular want can be satisfied by two or more goods, If we are thirsty, our thirst can be satisfied by cold drink or by a glass of juice.
- Wants depend on the availability of goods and services—some wants have always remained ahead of availability of goods and services.
The want-satisfying power of a commodity is referred to as Utility. It is the ability of a commodity to satisfy human wants. All the goods which people want to acquire possess utility. Bread has the ability to satisfy hunger.
FEATURES OF UTILITY:-
Utility is Subjective
—Utility is subjective, that is it cannot be observed and identified. It depends on the individual’s own subjective estimate of the amount of satisfaction he is likely to get from a good or service.
Utility is Not Measurable
—It is subjective and so it cannot be measured in objective terms.
Utility is Relative
—Utility is not absolute but relative in view of its subjective nature. It is relative to a person’s need. The utility of a thing to a person depends on his intensity of desire for the commodity; the greater the need, the greater is the utility. Moreover utility is not constant. It varies from place to place, time to time and circumstance to circumstance. For example a chapatti or a plate of rice gives more utility to a person when he is hungry as compared to a situation when his stomach is full.
Utility is Different from Usefulness
—Utility is not synonymous with usefulness. A commodity may possess utility even though it may not be useful. A commodity may or may not be useful, but as long as it has some use to an individual, it has utility.
Utility has no moral or legal implications
—Utility has no moral or legal implications. A commodity may be immoral for some, but still it may possess utility. For example, eating eggs may be against the religious sentiment for some but for a non-vegetarian person eating eggs would fulfill his hunger.
- Utility is abstract—Utility cannot be seen or touched, therefore it is abstract.
TOTAL AND MARGINAL UTILITY
| Total utility
It is referred to the entire amount of satisfaction obtained from consuming a given quantity of commodity.
If we eat four chapattis at dinner time, total utility is the total amount of satisfaction obtained from consuming four chapattis.
| Marginal utility
It is referred to as the additional utility arising from the consumption of one more unit of a commodity.
If the consumption of mangoes is increased from two mangoes to three mangoes, the marginal utility of consuming the third mango is the increase in total utility.
Diminishing Marginal Utility: It is generally observed that, as the amount of consumption of a commodity increases, the utility derived from the additional units, that is, the marginal utility goes on decreasing. This tendency of a decrease in the marginal utility with successive increase in consumption of a commodity is known as the ‘law of diminishing marginal utility’.
The price of commodity is the unit or amount of money that has to be given to get this commodity. Prices are determined based on the market forces of demand and supply. Any change in demand or supply conditions bring about change in price.
The valuation placed by a household on the consumption of a commodity is referred to as the value of that commodity.
Wealth refers to the stock of all those assets which are a source of income. Anything to be regarded as wealth must possess Utility, Scarcity, Transferability, and Exchange Value.
Welfare means a sense of satisfaction and happiness, a sense of well-being among the people.
In modern economies goods and services, as well as the factor services are sold and purchased with the use of money.
A market helps in buying and selling of goods and services. Market means a system or a set-up in which the buyers and sellers of a commodity are able to interact and communicate with each other.
Investment is defined as the act of using production resources for the production of capital goods, that is, goods that are used for producing other goods and services in the future.
Income can be defined as a flow of goods and services or flow of money accruing to an individual or all the people in an economy over some specified time.
Goods and services are needed to satisfy people’s wants. Therefore, goods need to be produced. The process of act of making goods and services is called production. Production is the process that is responsible in creating utility in goods.
Saving refers to that part of the income which is not spent on consumption. Households buy consumer goods with their income. However, the entire income may not be spent on the purchase of the goods, a part of the income may be saved for various reasons in the future.