Basic Concepts in Economics

The concept of consumer’s surplus was first introduced by Alfred Marshall. the difference between the amount of money that a consumer actually pays for buying a certain quantity of commodity and the amount  he would be willing to pay for the same quantity rather than go without it. When a consumer is prepared to buy a commodity, he always calculates the utility he is going to derive from its consumption. Every rational consumer compares the utility he derives from the consumption of a commodity, against the price he has to pay. If the utility is more than the price paid, he prefers it and if it is vice-versa, he does not buy the same good. The surplus of utility he derives is the consumer’s surplus. In a nutshell, a consumer’s surplus is the difference between what the consumer is willing to pay and what he actually pays. Assumptions of the Consumer’s Surplus The marginal utility of money for the consumer is assumed to be the same throughout the process of exchange. The commodit...

The basic tool of Hicks - Allen ordinal analysis of demand is the indifference curve that represents all those combinations of goods that give same satisfaction to the consumer. In other words, all combinations of the goods lying on a consumer’s indifference curve are equally preferred by him. The indifference curve is also called Iso-utility curve. Indifference schedule is the tabular statement that shows the different combinations of two commodities yielding the same level of satisfaction. Properties of Indifference Curve 1) ICs of two goods are negatively sloped 2) Indifference curves can never intersect 3) Indifference curves of two goods are convex to the origin 4) The higher the IC , the higher the utility (U3 > U2 > U1). Price Line or Budget Line- price line shows all those combinations of two goods which the consumer can buy by spending his given money income on the two goods at their given prices. Suppose, a consumer has Rs.50 to spend on goods X and Y. Let the prices o...

This law is also known as the law of substitution. “The law implies that if a person has a thing which he can put to several uses, he will distribute it between those uses in such a way that it has the same marginal utility in all” (Marshall). Assumptions 1. The consumer behaves rationally. 2. He has full knowledge about the commodities, their attributes, prices, etc., in the market. 3. Utility is measurable cardinally in terms of utils. 4. Commodities that are chosen are divisible and substitutable. Explanation of the Law Explanation of the Law Given the income constraint, the consumer makes prudent decisions in his purchases such that the allocation so made ensures him maximum satisfaction. Let us assume that the consumer has got Rs. 25 to spend. He has the option of spending this amount on three vegetables viz., potato, tomato, and ridge gourd. The marginal utilities that are derived from the consumption of these vegetables and the amounts of money spent are presented in the table. ...

The law of diminishing marginal utility is a generalization drawn from the characteristics of human wants, H.H Gossen was the first to formulate this law in 1854 . Marshall has stated the law of diminishing marginal utility as follows “The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has ”. In other words, the law simply states that other things being equal, the marginal utility derived from successive units of a given commodity goes on decreasing. Hence the more we have of a thing; the less we want of it because every successive unit gives less and less satisfaction. Assumptions : 1) All the units of the given commodity are homogenous i.e. identical in size shape, quality, quantity, etc. 2) The units of consumption are of reasonable size. The consumption is normal. 3) The consumption is continuous. There is no unduly long time interval between the consumption of the successive units...

Wealthy consists of all potentially exchangeable means of satisfying human wants (J.M. Keynes). Characteristics of Wealth 1. Wealth should Possess Utility: Wealth must be cap0able of satisfying human wants. 2. Wealth must be Scarce: Scarcity is the binding factor for exchange. Economic goods are exchangeable. Since wealth represents economic goods, it must be scarce. 3. Wealth Must Transferable: Transferability implies changing the ownership of a good from one to another. It is nothing but exchangeability. 4. Wealth Must be External to Person: This quality of wealth enables exchange. Types of Wealth: These are: 1. Individual Wealth: Individual wealth consists of all tangible and intangible possessions of the individuals, besides loans due to them. Land, buildings, vehicles, shares, bonds, deposits, commodities for sale, cash, etc., are tangible possessions. Goodwill of a business, copyrights, patents (non-material external goods), etc. , are intangible possessions. From the total...

The capacity of a good that satisfies a human want. In other words, utility is the want satisfying power of a good. Also, it means the power of a commodity to satisfy a human want. Kinds or Types of Utility Utilities are classified into different kinds. A particular kind or type of utility for a commodity is found in a particular situation. The kinds of utilities are 1) Form utility 2) Place utility 3) Time utility 4) Possession utility. 1. Form Utility By changing the form of a good, the greater utility is created. It does not mean that before the change of form of good, there was no utility. It means that change in the form offers greater utility to the good. Examples: the transformation of a log of wood in to a piece of furniture, Processing of paddy into rice, wheat into flour, coffee seeds into coffee powder, butter into ghee, cotton into cloth, etc. 2. Place Utility Utility can also be increased by transporting a good from one place to another. Such utility is called place utili...

 Goods Anything that satisfies a human want is called good. Goods are the tangible and material outcomes of production. Examples: Food grains, pulses, oilseeds, machinery, implements, seeds, fertilizers, cloth, book, pen, etc. Service A service is any act or performance that one party can offer to another i.e., essentially intangible, and does not result in the ownership of anything. Services are intangible, non-material, inseparable, variable, and perishable. The services rendered by doctors, teachers, lawyers, engineers, laborers, etc., are examples. Classification of goods Goods are categorized based on four criteria viz., supply, transferability, consumption, and durability as given below: Based on Supply Based on supply, goods are classified into economic goods and free goods. Economic goods are those goods, which are produced through human efforts and are to be purchased at a given price. Supply is less than demand. They have value in use and value in exchange. Buildings, ma...