Economic Analysis

Module 1. Basic concepts of economics

Lesson 3
BASIC TERMS PART-I

3.1 Introduction

Economics may appear to be the study of complicated tables and charts, statistics and numbers but more specifically it is the study of what constitutes rational human behavior in the endeavor to fulfill needs and wants. In this context this chapter describes the basic terms used in the subject of economics.

3.2 Basic Terms of Economics

3.2.1 Goods

Things that satisfy human wants are called goods. Goods can be classified as follows.

i) Free and Economics Goods : The goods which can be obtained free of cost are available in nature in abundant form e.g. Air, Things which are limited and one has to pay for the same are referred to as economic goods. free goods are natures gift whereas economic good are man made.

ii) Consumption and Capital Goods : The goods which provide satisfaction directly are called consumption goods. Majority of things which we use in our daily lives to meet our personnel need fall in this category e.g. food items, ornaments, notebook etc. The goods which are utilized to manufacture other goods are called capital goods. The things used in industrial establishments fall in this category e.g. plant and machinery, farm implements etc.

iii) Intermediate Goods: This are the goods used to manufacture consumption goods through use of capital goods. It comprises all type of raw material used in industrial establishments. E.g. Leather used in between industry to manufacture shoes.

iv) Tangible and non tangible goods : Material goods having a specific physical form is a tangible good e.g. television. Certain intangible aspects of organization which are crucial for its success or failure are categorized as intangible goods e.g. reputation, services, etc.

v) Personal and impersonal Goods : The inherited specific characteristics possessed by any individual which determines his or her personality is a personal good. e.g. ability and skill of a carpenter. The outside external goods possessed by individuals / organization is called impersonal goods e.g. A well furnished office building.

vi) Transferable and Non Transferable Goods : The tangible goods for which ownership can be changed are transferable goods. This may involve actual physical transfer e.g. selling a car or mere change of ownership e.g. selling a house. The goods for which no such change either physical or otherwise can take place fall in the category of non transferable goods. e.g. skill of a physician.

vii) Public and Private goods : Common property belonging to all persons of a society is a public good. e.g. Road, government park etc whereas property belonging exclusively to specific individuals is a private good e.g. houses owned by individuals in their name.

viii) Necessaries, Comforts and luxuries : The goods which are very much essential for our existence are necessary goods e.g. food. The goods which are not essential but they improve the life or help to enjoy life in a better way are called comforts e.g. Air Conditioner. All superfluous consumption which even can be avoided are categorized as luxuries e.g. modern day costly cars.

3.2.2 Utility

Want satisfying quality of goods is known as utility. Utility is classified into form place and time utility. Form utility is provided by changing the physical form of an item and transferring that item and using it in scarcity renders it time utility e.g. converting milk into milk powder provides form utility. Transporting this milk powder to hilly areas in Himalaya for our defense personnel provides place utility. Storing this powder and using in lean season for reconstitution offers time utility.

3.2.1.1 Features of utility

In Economics sense a thing might posses utility but it may not be useful. In certain circumstances it might be even injurious. e.g. for a drug addict drugs satisfy their want but is not useful. A gun provides utility and usefulness to military personnel but the same is not desirable in the hands of terrorist. In economics, utility is not associated with ethnicity or morality. Utility and Pleasure are also not associated. Due to health reasons, people are required to consume medicines. They do not give pleasure but do possess utility. Utility varies with circumstances and persons e.g. drugs do not provide any utility to a person who is not drug addict. An umbrella has a utility in rainy season. Utility is thus a subjective concept.

3.2.3 Wealth

The meaning of term wealth in ordinary language and economic language is different. It is given in the Table 3.1.

Table 3.1 Difference between wealth in ordinary language and economic language

3.2.3.1 Prerequisite for wealth

For a thing to be considered as wealth, it should satisfy all the following three conditions

1. It should posses utility and satisfy human want

2. It should be scarce

3. It should be transferable

3.2.3.2 Classification of wealth

1. Individual Wealth: Excluding the skill and intelligence which are not directly transferable of a person, all other material and non material things owned by an individual is called individual wealth.

2. Social Wealth: The common things owned by local government body and used by all persons are called social wealth e.g. government education institutes, hospitals.

3. National Wealth: It is summation of wealth of all citizens of nations.

Cosmopolitan Wealth: It is summation of wealth of all the nations.