Indroduction to economics

 Economics is a social science which deals with human behavior as a relationship between limited resource and unlimited want.

The word ‘economics’ comes from two Greek words, ‘eco’ meaning home and ‘nomos’ meaning accounts. The subject has developed from being about how to keep the family accounts into the wide-ranging subject of today.

Economics has grown in scope, very slowly up to the 19th century, but at an accelerating rate ever since. Today it has many of the features of a language. It has linguistic roots, grammatical rules, good and bad constructions, dialects and a wide vocabulary which grows and changes over time.

  One of the founding fathers of economics, Alfred Marshall, advised as follows:

Every short statement about economics is misleading (with the possible exception of my present one).

Nevertheless, definitions are a useful place to begin. A standard definition of economics could describe it as:

a social science directed at the satisfaction of needs and wants through the allocation of scarce resources which have alternative uses

Economics Concept # 1. Utility of goods :

Ordinarily, the concept of value is related to the concept of utility. Utility is the want satisfying quality of a thing when we use or consume it. Thus utility is the value-in-use of a commodity. For instance, water quenches our thirst. When we use water to quench our thirst, it is the value-in-use of water.

In economics, value means the power that goods and services have to exchange other goods and services, i.e. value-in-exchange. If one pen can be exchanged for two pencils, then the value of one pen is equal to two pencils. For a commodity to have value, it must possess the following three characteristics.

Utility:

It should have utility. A rotten egg has no utility because it cannot be exchanged for anything. It possesses no value-in-exchange.

Scarcity:

Mere utility does not create value unless it is scarce. A good or service is scarce (limited) in relation to its demand. All economic goods like pen, book, etc. are scarce and have value. But free goods like air do not possess value. Thus goods possessing the quality of scarcity have value.

Transferability: Besides the above two characteristics, a good should be transferable from one place to another or from one person to another. Thus a commodity to have value-in-exchange must possess the qualities of utility, scarcity and transferability

Basic Concept of Economics # 2. Value and Price:

In common language, the terms ‘value’ and ‘price’ are used as synonyms (i.e. the same). But in economics, the meaning of price is different from that of value. Price is value expressed in terms of money. Value is expressed in terms of other goods. If one pen is equal to two pencils and one pen can be had for Rs.10. Then the price of one pen is Rs.10 and the price of one pencil is Rs.5.

Value is a relative concept in comparison to the concept of price. It means that there cannot be a general rise or fall in values, but there can be a general rise or fall in prices. Suppose 1 pen = 2 pencils. If the value of pen increases it means that one pen can buy more pencils in exchange.

Let it be 1 pen= 4 pencils. It means that the value of pencils has fallen. So when the value of one commodity raises that of the other good in exchange falls. Thus there cannot be a general rise or fall in values. On the other hand, when prices of goods start rising or falling, they rise or fall together. It is another thing that prices of some goods may rise or fall slowly or swiftly than others. Thus there can be a general rise or fall in prices.

Basic Concept of Economics # 3. Wealth:

In common use, the term ‘wealth’ means money, property, gold, etc. But in economics it is used to describe all things that have value. For a commodity to be called wealth, it must possess utility, scarcity and transferability. If it lacks even one quality, it cannot be termed as wealth.

Wealth may be of the following types:

1. Individual Wealth:

Wealth owned by an individual is called private or individual wealth such as a car, house, company, etc.

2. Social Wealth:

Goods which are owned by the society are called social or collective wealth, such as schools, colleges, roads, canals, mines, forests, etc.

3. National or Real Wealth:

National wealth includes all individual and social wealth. It consists of material assets possessed by the society. National wealth is real wealth.

4. International Wealth:

The United Nations Organization and its various agencies like the World Bank, IMF, WHO, etc. are international wealth because all countries contribute towards their operations.

5. Financial Wealth:

Financial wealth is the holding of money, stocks, bonds, etc. by individuals in the society. Financial wealth is excluded from national wealth. This is because money, stocks, bonds, etc. which individuals hold as wealth are claims against one another

Basic Concept of Economics # 4. Stocks and Flows:

Distinction may be made here between a stock variable and a flow variable. A stock variable has no time dimension. Its value is ascertained at some point in time. A stock variable does not involve the specification of any particular length of time. On the other hand, a flow variable has a time dimension. It is related to a specified period of time.

So national income is a flow and national wealth is a stock. Change in any variable which can be measured over a period of time relates to a flow. In this sense, in venturis are stocks but change in inventories in a flow.

A number of other examples of stocks and flows can also be given. Money is a stock but the spending of money is flow. Government debt is stock. Saving and investment and operating surplus during a year are flows but if they relate to the past year, they are stocks. But certain variables are only in the form of flows such as NNP, NDP, value added, dividends, tax payments, imports, exports, net foreign investment, social security benefits, wages and salaries, etc.

Basic Concept of Economics # 5. Optimization:

Optimization means the most efficient use of resources subject to certain constraints it is the choice from all possible uses of resources which gives the best results, it is the task of maximization or minimization of an objective function it is a technique which is used by a consumer and a producer as decision-maker.

A consumer wants to buy the best combination of a consumer good when his objective function is to maximize his utility, given his fixed income as the constraints. Similarly, a producer wants to produce the most suitable level of output to maximize his profit, given the raw materials, capital, etc. as constraints.

Important Differences

Wealth and Capital:

Goods which have value are termed as wealth. But capital is that part of wealth which is used for further production of wealth. Furniture used in the home is wealth but given on rent is capital. Thus all capital is wealth but all wealth is not capital

Wealth and Income:

Wealth is a stock and income is a flow. Income is the earning from wealth. The shares of a company are wealth but the dividend received on them is income.

Wealth and Money:

Money consists of coins and currency notes. Money is the liquid form of wealth. All money is wealth but all wealth is not money.

IS VALUE & PRICE SAME ???? Answer this Question in Comment !!!

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