Importance of Economics utility

Value of economic products with reference to price &

wealth
Classification of wants with reference to necessaries,
luxury and comforts
Theory of consumption

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 Economics means…?
Economics studies how human should utilize the available resources and for doing it “Rules of Household”
is necessary for proper functioning. Hence, Economics is a Social Sciences which deals with human activities
for satisfying their needs by consuming their available wealth.

Economic utility

Economic utility
to Engineers and
managers

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 Difference Between Economics and Economy
Basically, economics is the study of an economy, i.e. its structure, condition,
working, performance, issues, remedies, etc. It includes the analysis of the different
types of the economic system, economic decisions.
On the other hand, an economy indicates a region, a particular area or
country, concerning production, distribution, consumption, and exchange of goods and
services, and supply of money.

BASIS FOR COMPARISON ECONOMICS ECONOMY

Determines How human beings make How resources are allocated
decisions when there is among different members of
scarcity of resources? society?

Focuses on The way in which economic The way in which country's

agents behave and interact economic affairs are
and the way in which organized and conducted.
economies work.

Session quiz:
https://docs.google.com/forms/d/1TWRNytbk29MnTh02Z07DYeOmVaJp0BPqW
3
uDjnDr_Kaw/edit?gxids=7757
 GOODS
• Anything material or immaterial, which can satisfy human wants are
goods.

Free goods Economic Goods

Supply is unlimited and infact more than Transferable goods, the supply of which
required. is scarce in relation to demand are
economic goods.
Eg: water of the ocean, sand of the
desert Scarcity is not a fixed quantity.

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 Definitions:
• Adam Smith: Economics is a science of wealth. Its nature and
uses.

• Alfred Marshal: Economics is a study of men’s actions in the

ordinary business life. i.e; the study of science of human welfare.

• Lionel Robbins: The Science which studies human behaviour as a

relationship between wants or ends and scarce resources which
have a alternative uses.

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 Salient features of Robbins definition:
• Unlimited wants: Wants are unlimited in number and it is difficult to satisfy all
those.

• Scarce resources: The resources are said to be scarce when they are limited in
supply with relation to the total demand.
Economic problems arise only because of scarce resources.

• Alternative uses: A commodity or goods can be put into different alternative uses.
• Choice: of all the alternative uses, decision has to be made to satisfy the unlimited wants
with the available scarce resources.

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Types of Economics
1. Micro-Economics:
It is the microscopic view of the economy, wherein the economic activity of small individual
units and their decisions related to production, exchange, distribution and consumption are
studied so as to know how prices and quantities of goods and wage rate of the workers are
determined.
These small individual units, i.e. person, household, firm, industry, government, etc. when
taken together, make up the entire economy.
Microeconomics discusses the choices made by the people in an economy and the factors
which influence those choices. Further, it studies, how the decisions of the economic agents
regulate the utilization and distribution of scarce resources and how these decisions influences
the demand and supply of the commodity, which determines its price.

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SUBJECT MATTER OF MICROECONOMICS
• Consumer Behavior
• Product Pricing
• Factor Pricing
• Production Costs
• Demand
• Supply
• Location of Industry
• Behavior of Firms
• Economic condition of people of the economy.
• Market Equilibrium
• Market Structure
• Non-Competitive Market

The primary aim of the microeconomic analysis is reaching the state of

equilibrium, from the perspective of individual economic units. 8
 2. Macro-Economics
 The word “Macro” is derived from Greek word “Makros”, “large or very big”.

The Macro economics studies the economy as a single unit. It does not deal
with Individual units. It deals with the aggregates ‘or’ totals and averages.

Eg: Total national income, total employment of the nation, overall output of a
business organisation, total investment and aggregate consumption.

Macro economics is concerned with such variables as a aggregate volume of

output of a economy with the extend to this resources are employed with the size
of the national Income and with the general price level.

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The Macro economics analyzes some problems of
the economy
● Level of output and employment
● Fluctuations in level of output, employment and National Income
● Changes in the general price level
● Economic growth and economic development
● Theories of distribution
Significance of Macro economics:
● Understanding the working of an economy
● Formulating policies
● Prepare the economics plans
● Take the remedial measures of trade cycles & Inflation
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 GDP vs. GNP: An Overview
Gross domestic product (GDP) is the value of a nation's finished
domestic goods and services during a specific time period.
gross national product (GNP), is the value of all finished goods and
services owned by a country's residents over a period of time.
Both GDP and GNP are most commonly used measures of a country's
economy, both of which represent the total market value of all goods
and services produced over a defined period.
There are differences between how each one defines the scope of the
economy. While GDP limits its interpretation of the economy to the
geographical borders of the country, GNP extends it to include the net
overseas economic activities performed by its nationals.

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 Subject Matter of Economics
In economics, a want is something that is desired.
Want is the starting point of economic activity.
Wants leads to efforts. An effort leads to satisfaction.
This is the subject matter of economics. This subject
matter of economics is divided into four parts. They
are called economic activities.
1. Production
2. Exchange
3. Distribution
4. Consumption
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1.Production: In economics, Production involves the
creation of goods and services by using resources. It is
a process to change the raw materials into
final/finished goods. It is nothing but creation of utility.
To produce anything, so many factors are essential. All
these factors are classified into four categories. They
are:
● Land
● Labor
● Capital
● Organization
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2.Exchange: It means change of the goods from one person to another person. Once upon a
time goods are exchanged for goods. It is called “Barter system”.
To overcome the Inconveniences in the barter system, currency was invented. Now the goods
are exchanged for money. Price is essential for the exchange of goods for money.

3. Distribution: Distribution means sharing of the income among the factors of production.

The total income which is generated by selling of these goods and services in the market
must be distributed among the factors of production in the form of rent, wages, interest and
profits.

4. Consumption: It is an act to use the goods or service to satisfy the wants.

Whenever we make use of any commodity or service for the satisfaction of our wants, the
act is called consumption.

Session quiz: https://docs.google.com/forms/d/1R4jmPRFaLKE0Pl6j-drcyzWlilSSTCcZMk0sZG-

MCyM/edit?gxids=7757

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 UTILITY (value in use)
The capacity of a commodity to satisfy human wants is known as its Utility.

Utility is a measure of satisfaction an individual gets from the consumption of

the commodities. In other words, it is a measurement of usefulness that a
consumer obtains from any good.

A utility is a measure of how much one enjoys a movie, favourite food, or other
goods. It varies with the amount of desire.

Utility of an article is not inherent in a commodity, it is the relationship existing

between the consumer and commodity.

Utility of a product is not fixed and varies according to the urgency of the human
wants that it satisfies.
Eg: Water, AC’s in summer & winter, etc.
Characteristics of utility:
● Utility is a subjective concept: It is a psychological concept. It is the mental
assessment of a commodity. So utility differs from person to person because
of difference in taste, preferences, likes and dislikes of a person.
E.g., chalks have more utility to a teacher than a student.

● Utility is a relative term: It is related to time and place. With change in time
and place, utility of the same commodity changes.
Cold drinks have more utility during summer than winter. Woolen clothes
have more utility in Kashmir than Jaipur.

● Utility depends on the intensity of want: More urgent or intense the want,
more will be the utility.
E.g. Books have more utility to students just before the exams.
 Characteristics of utility Contd...
● Utility differs from usefulness: Utility indicates the power of a good to satisfy
human wants irrespective of whether it is good or bad or harmful. While
usefulness means that the commodity is beneficial or desirable. A commodity may
have utility but may not be useful.
E.g., cigarette is injurious to health, it is not useful but it has utility to a smoker.

● Utility cannot be measured: Utility is psychological and subjective. It is intangible.

So it cannot be measured numerically. It can only be expressed ordinally or
cardinally.
Eg 1: first slice of bread will have very high utility for a very hungry person than
the 2nd slice. (ordinally)- Ranking or preference or comparision
Eg 2: Consuming first slice of bread is giving 20 utils, then consuming second slice
of bread is giving 15 utils. (cardinally)- satisfaction levels in terms of some scalable
numbers.

● Utility differs from satisfaction: Utility and satisfaction are related but there is a
difference. Utility is expected satisfaction and is measured before the use of
commodity while satisfaction is actual realisation which comes after consumption.
 VALUE
• It is the power of a commodity to command other commodities in
its exchange.

• Value express the relationship or ratio between two commodities

and depends like utility upon external circumstances and it is not
determined by internal characteristics.

• An article possessing utility may or may not have value but no article
can have value unless it possess utility.

• To possess value in exchange, a commodity must be only in use or

possess utility, but also it must be limited in supply.

• The more the supply is limited, the greater is the value.

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 Value

Measured as Price Measured in terms of Wealth

(value expressed in
terms of money)

Product availability Product should be in

Product should have
should have position to be
utility/consumption by
scarcity, thereby its transferred as per the
consumers
value increase owner’s choice

Value of a product exists, if it can be utilized to get another product in exchange……

Eg: Money/Gold/Assets has more value than most of the manufacturing products, as
they are capable of generating another product of our choice of same value in exchange.

Learning outcome: Define utility and time value of economic goods. [L1]
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 WEALTH
• Wealth is synonymous with economic goods.

• Wealth consists of all those commodities which are exchangeable.

Attributes of Wealth:
1. Utility: An article can have value only if it is capable of satisfying some human
want, i.e.; if it has utility and without which no article can become wealth.

2. Scarcity: It must be scarce in relation to demand as no article can have value if

it is in excess of demand.

3. Transferability: It must be transferrable as none would demand a commodity

of which he can not be owner. But it is not to confused with portability.

• Thus the term wealth includes not only those material goods which are
transferrable and external (eg: buildings, machinery, etc.), but also non
material goods which are external to men and are transferrable. (eg: good will
of the business, copyright of a book, etc.) 20
Classification of wealth
Personal or Private wealth: It is the wealth which belongs to certain person.
It includes all those economic goods which belongs to him and which he can sell.
Eg: The debts which an individual owes to the others may be regarded as his negative wealth and they
must be subtracted from his good possessions to arrive at his true net wealth.

Collective or communal wealth: It is the wealth owned by municipal boards or provincial and central
governments.
Eg: Public buildings, public parks, roads, harbours, etc.
Municipal government bodies represents the community and their wealth may be regarded as the
wealth collectively owned by the citizens.

National wealth: It is still wider and it includes:

(i) Personal wealth of all citizens of country.
(ii) Collective wealth of the nation.
(iii) Natural advantages possessed by a country. Eg: Geographical position, climatic conditions, mineral
resources, etc.
(iv) Non-material elements like characteristics of members of the nation and reputation of the country.

Cosmopolitan or International wealth: It includes the wealth belongs to all the nations of world plus
the wealth shared by all of them in common.
Eg: Oceans, scientific knowledge, mechanical and atomic inventions, etc: 21
 WANTS
• Want is the desire, ability and willingness to consume a product.

Essentials of a want:
• There ought to be desire for an article.
• There ought be the ability to satisfy it or in other words, the possession of the
means of its satisfaction.
• There must be a willingness of spare the means for the purpose.
When desire is backed by ability and willingness to satisfy, it is called effective
desire or want.

Circle of wants and activities:

Wants and economic are very closely related and infact, wants are the real motive
force which sets the entire economic mechanism into motion.

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CHARACTERISTICS OF WANTS:
• Wants in general are unlimited.

• Each particular want is capable of complete satisfaction.

• Wants vary in intensities.

• Wants are competitive.

• Wants are recurrent.

• Some wants are compulsory.

• Present wants are more important than future wants knowledge increases
wants.

• Wants are determined by social standards of tastes and is particularly true for
wants for clothing, shelter and amusements, etc.

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 Classification of Wants
Wants

Preliminary wants Secondary wants

Physiological Social/convective
Manipulative skills Comforts Luxury
needs needs
(Necessaries for (Necessaries for (Necessaries for
(Necessaries for (Necessaries for
efficiency) pleasure) great pleasure)
existence) social being)

(1) Necessaries: Necessaries are those wants which are very important
and if they remain unsatisfied, more pain is caused and satisfaction is necessary for
the preservation of life, efficiency or social prestige.

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 Necessaries for existence:
• The articles which are just necessary for the preservation of life are known as
necessaries for existence.
Eg: food, clothing and shelter, without which life can’t be preserved.
• These are not the same in all the countries, climates and all the time to time.

Necessaries for efficiency:

• The articles which are necessary for the preservation of one’s efficiency in the
occupation he is engaged in.
• He has consume certain things over and above the bare necessaries of existence,
which are known as necessaries for efficiency.
Eg: well-balanced food, good clothing’s, and furniture, airy, well-ventilated house
for shelter, good children’s education, medical treatments, etc.

Conventional necessaries:
• These are consumed for social convention and prestige because man as a
member of society has to follow certain set of conventions and traditions to
avoid a bad name and ex-communication.
Eg: Pan, tobacco, alcohol, etc. 25
(2) Comforts: The consumption of these articles affords appreciable pleasure and also
increases consumer’s efficiency slightly, while their neither non consumption causes much
pain nor decreases actual efficiency are known as comforts and are necessary for decent
living.
Eg: Cosmetics, Good shoes and branded cloths, etc.

(3) Luxuries: These are the articles whose consumption affords very great pleasure, but
does not contribute to our efficiency and whose non consumption neither causes any pain
nor decreases our efficiency.
Eg: Duplex houses or villas, costly cars, etc.

 There are certain articles of luxury like wine which gives us only fleeting pleasure but
decreases our efficiency quite considerably and are known as extravagancies.

 Learning outcome: Distinguish between necessities, comforts and luxuries. [L2]

 Session quiz:
https://docs.google.com/forms/d/1APwl4JaKvjhD9GnhC9gVss_WC1U3DqHjE39OavxGxP0/edit
26
?ts=5f493c6e&gxids=7757
 Theory of Consumption
Engel’s Law of consumption:
Categories families
(i) The labour class
(ii) The middle class
(iii) The well-to-do class
Items of expenditure:
(i) Food (ii) Clothing (iii) Lodging (iv) Heat, Light & Fuel (v) Education, Health, Servants & Miscllaneous,
etc.

Percentage of its income spent by

Items of expenditure Labour class Middle class Well-to-do-class
Food 60 55 50
Clothing 18 18 18
Lodging 12 12 12
Heat, Light & Fuel 5 5 5
Education, Health, Servants 5 10 15
& Miscellaneous, etc.
Total 100 100 100
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Theory of Consumption
Assumptions:
 Range of products available
 Prices of all products
 Capacity of products to satisfy
 Income

Utility - The benefit or satisfaction that a person gets from the consumption of a
good or service.

Utility Analysis: Numerical score represents the satisfaction.

Eg: (i) buying 3 copies of books gives more happiness than buying a shirt.
(ii) Comparison between two food items A&B, A>B OR B>A, Relationship between
two goods.

Utility Function:
U= F(X, Y)
Total Utility= U(X) + U (Y)
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 Utility Measurement
Basis for comparison Cardinal Ordinal
1. Meaning Expressed numerically (Utils) Can’t be expressed numerically,
can do ranking or comparison
2. Approach Quantitative Qualitative
3. Realistic Less More
4. Analysis Marginal Utility Analysis Indifference curve analysis
5. Promoted by Classical & Neo-Classical Modern Economics
Economics
Eg 1: Food in three restaurants
Total satisfaction: 1- 10 Utils, 2- 12-Utils, 3- 18 Utils---- cardinal
Total satisfaction: 3-2-1----- Ordinal

Eg 2: Goods Utils (Cardinal) Rank order (Ordinal)

X1 14 2nd
X2 03 5th
X3 10 3rd
X4 08 4th
X5 17 1st 29
 TOTAL UTILITY MARGINAL UTILITY
• It is the total utility of a • It refers to the additional utility
consumer derives from the derived from consumption of an
consumption of all the utils additional unit.
of a good or a combination of • Marginal Utility is the slope of the
goods over a given total utility curve.
consumption period.

• MU= (Change in TU)/ Change in Q

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Theory of Consumption
• A household’s consumption choices are determined by
• Budget constraint
• Preferences.
1. Law of Diminishing Marginal utility: States that “The marginal
utility derived from every additional unit increase in the quantity of a good consumed
goes on decreasing, while other things remains the same.
Conditions:
(1) The unit must of consumption (nature, size & quality) must be standard one.
(2) Consumption must be continuous i.e.; zero time interval between two levels of consumption.
(3) The tastes & preferences of the consumer should remain unchanged during the course of
consumption.
(4) The goods should be normal & should not be addicted in nature.
(5) Prices of related goods.
Eg:
(1) Consumption of coffee or tea
(2) Watching a movie
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(3) Reading a book
 Eg: Consumption of No” of sweets

QUANTITY TOTAL UTILITY MARGINAL UTILITY

1 20 ---
2 35 15
3 47 12
4 55 8
5 55 0
6 48 -7

 Exceptions of this Law: Any violation of the factors like Taste, preference, price, time
interval, quality, quantity, etc violates this law.
 E.g: Consumption of water by a thirsty person increases his marginal utility for every
additional unit, if he is been given water in drop by drop to drink rather than with a jug of
water.
 E.g: A cricket batsman gets more marginal satisfaction when he obtains last runs when he is
near to his half-centaury or centaury.

 Note: (1) This law describes about consumption pattern of the consumer.
(2) It forms basis for many decisions related to production, pricing & investment.32
 2. Law of Equi-Marginal Utility

• Every consumer allocates his income equally to all the product he require for his
wants, so Equi-Marginal Utility states that, “The consumer will be in a state of
equilibrium, when he gets marginal utility from the products bought are equal”.

• (Marginal utility of product X/ Price of X) = (Marginal utility of product Y/ Price of Y)

• Eg: 5000/-
Marginal Utility obtained from
Units bought Pants Shirts
1 40 35
2 32 28
3 28 20
4 20 10
5 10 8

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 3. Consumer Surplus:
• Consumer will be prepared to buy a product at its original price and gets maximum
marginal utility. If, he pays more or less to the actual price of the product, then
consumer marginal utility either goes down or up, respectively.
 Consumer Surplus is a state of situation, where “the difference between the price
that consumer is prepared to pay and the price that he is exactly paying”.
 In other words, “It is the value a consumer gets from a product without paying
for it”.
 The concept of consumer’s surplus is very significant for the monopolist or the
trader to assess where the consumer is prepared to pay a higher price and at what
point exactly he is paying a low price.
 In such cases, the trader can marginally increases the price without loosing the
demand.

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4. The Indifference Curves:
• It states that, “the indifference to a particular combinations of goods or services,
as every combination yields him the same marginal utility.

• Assumptions:
 The consumer behaves rationally to maximise his
satisfaction.
 The prices and incomes of the consumer are defined
for analysis.
 The tastes & preferences of the consumer do not change during the analysis

Properties of Indifference Curves:

 It slopes downwards from left to right.
 It is convex to the origin. (marginal rate of substitution)
 No two indifference curves are not intersected to each other.
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5. Consumer equilibrium:

 It is a situation in which “a consumer has allocated his/her income in the way that, given
the prices of goods and services, maximizes his/her total utility”.
Or in other words “It is a situation where consumer gets maximum satisfaction with his
limited budget. This happens at a point of income, where the budget line is tangential
to the indifference curves.

Slope of budget line= (Income/Px)/ (Income/Py)

= Py/Px

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