Basic Economic Concepts and

Precepts
What are Goods/Services
●
‘Goods’ refer to those things (whether a
commodity or a service) which possess
utility, or are capable of satisfying human
wants
Classification of Goods
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Free Goods: Exist in plenty, without payment, eg
air, sunshine
●
Economic Goods: Scarce goods, have a price
●
Consumers’ Goods: yield satisfaction directly, eg
food, clothes
●
Producers’ Goods: yield satisfaction indirectly,
help in producing other goods, eg machines, tools
(Capital Goods)
…Classification of Goods
●
Material Goods: tangible, land, buildings,
furniture etc
●
Non-material goods: Services, intangibles, eg.
Goodwill of a business
●
Transferable Goods: Change in ownership
whether physical or non-physical is possible, eg.
Car, land
●
Non-transferable Goods: Personal qualities which
cannot be transferred, eg. Skill, ability,
intelligence
…Classification of Goods
●
Personal Goods: Personal qualities of a person,
non-material or internal goods, eg. Skill, ability
●
Impersonal Goods: External, lie outside a person,
eg. Land, houses
●
Private Goods: Property of private individuals
exclusively, not shared, eg. Buildings, land.
●
Public Goods: Common to all, owned by society
collectively, eg. Roads, parks, street lights
…Classification of Goods
●
Normal Goods: Demand directly related to
level of income
●
Inferior Goods: Demand inversely related
to the level of income
 What is Utility?
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Usefulness in ordinary speech
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Want-satisfying power of a commodity in economics
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Utility refers to that quality of a commodity by which
it is capable of satisfying human wants irrespective
of its good or bad effects, eg alcohol, cigarettes
●
Utility has no ethical or moral significance
●
Utility is subjective- differs from individual to
individual
●
Utility is not the same thing as usefulness,
satisfaction or pleasure
Forms of Utility
●
Form Utility: a log of wood converted into
furniture
●
Place Utility: furniture transported to a
market where it fetches a higher price
●
Time Utility: Furniture kept in godown to
sell at a higher price in the future
Value-in-use and Value-in-
exchange
●
Value-in-use is nothing but utility, want-
satisfying power of a commodity, commodity
may or may not have a value in the market
●
A commodity or service having value-in-
exchange other than having utility also has a price
in the market
●
Value of a commodity/service expressed in terms
of money is nothing but the price
What is Value in Economics?
●
Value in Economics is the Value-in-
exchange
●
This means the purchasing power of a
commodity in terms of other commodities
and services
●
In order to have value, a commodity must
be capable of being bought and sold
What is Wealth?
●
Money in ordinary language
●
In economics it has got a very wide
meaning, anything which possesses value
(value-in-exchange) is wealth
●
Besides money, it can include furniture,
land, buildings, goodwill etc.
Wealth cont..
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Wealth and capital

●
Wealth and Income

●
Wealth and Money
Marginalism
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Due to scarcity resources have to be utilised
carefully
●
A decision regarding additional labour, input,
investment, sale of unit, etc. has to be taken in view
the additional return expected there from.
●
The marginal concept measures the rate of change
in the dependent variable. E.g. marginal output of
labour is the change in total output by employing
one more additional unit of labour.
Marginalism
●
Due to scarcity resources have to be utilised
carefully
●
A decision regarding additional labour, input,
investment, sale of unit, etc. has to be taken in view
the additional return expected there from.
●
The marginal concept measures the rate of change
in the dependent variable. E.g. marginal output of
labour is the change in total output by employing
one more additional unit of labour.
Example of Marginal Product
●
No-L Tot OutAvr O Mar Out
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1 10 10 -
●
2 22 11 12
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3 36 12 14
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4 48 12 12
●
5 55 11 7
●
6 60 10 5
Marginalism cont..

●
In real world it is difficult to apply this concept as
independent unit vary in bulk and not in single units.
Hence we use the concept of incrementalism where
we study how dependent variable changes due to
chunk changes in independent variables.
Marginalism cont..

●
Marginal concept is utilised in
●
A. marginal output of labour
●
B. marginal output of machine
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C. marginal revenue of product
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D. Marginal return on investment
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E. Marginal cost of production
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F. Marginal utility of consumption
Time perspective
●
Time dimensions in managerial decision
making is very imp.
●
A. Temporary run: The supply of output is
totally fixed
●
B. Short run: The supply can be changed
slightly with change in variable factors &
better utilization of fixed factors
●
C. Long run: All factors are variable &
therefore output level can be adjusted freely
as per demand conditions.
Stock & Flow Variables
Stock variables - the quantity of a variable at
a point in time.
e.g Total outstanding debt as on 31March,
2005
Flow variables - expressed per unit of
time.Capital stock is a stock variable while
return on the capital stock is flow variable.
 Equilibrium and disequilibrium

. Equilibrium- a state from which

consumer/producer has no tendency to
move.
Micro – D = S or MC = MR
. Macro level-an economy is said to be in
equilibrium when AD = AS and I =S
. Disequilibria is a state where the economic
unit has a tendency to change.