Glossary

DR. I. THIAGARAJAN & CHITRA

RANGAMANI
Consumerism

Happiness depends to a very

Consumerism: An attitude in
which consumption is seen
as prime source of personal
well being
large extent on the level of
Consumerism is the belief
personal consumption,
that personal wellbeing
particularly on the purchase
of material goods.
Consumption

The satisfaction of our wants by using What affects consumption?

commodities and services • Price
• Taxes
• Savings
• Economic situation
Demand
Demand is
an economic principle referring
to a consumer's desire to
Desire backed up by purchase
purchase goods and services
and willingness to pay a price
for a specific good or service.
Economists use the
term demand to refer to the
amount of some good or
service consumers are willing
and able to purchase at each
price.

Demand is based on needs and

wants—a consumer may be
Demand is also based on ability
able to differentiate between a
to pay. If you can’t pay for it,
need and a want, but from an
you have no effective demand.
economist’s perspective, they
are the same thing.
Disposable Income

Disposable income is If disposable income If disposable income

personal income that decreased, the increased household
remains after direct household has less have more money to
taxes and government money to spend and spend and save and
charges have been paid save. consumption increases
 Anything that satisfies a human want is called
as goods.
Goods may be free goods or economic goods
Goods ◦ Consumer
◦ Producer
◦ Perishable
◦ Durable
 Income is what yields wealth

Money Income
Money income is the dollar amount of income that
is usually earned through work. Money income
does not take into account inflation, purchasing
power, or other factors that may affect the actual
Income value of money income

Real Income
'Real income' is the dollar value a person earns
considering the purchasing power, inflation, and
other factors that can affect the value of that
money.
Inequality
When resources are used to satisfy the needs of the rich
at the expense of the poor

Economic inequality is the difference in how assets,

wealth, or income are distributed among individuals
and/or populations. It is also described as the gap
between rich and poor or the "wealth gap".
Inflation
Inflation refers to a rise in the average level of prices
sustained over time, which also corresponds to a fall in
the internal (domestic) purchasing power of money.
 Refers to a good or service in a situation where
the buyers and sellers are in direct competition
with one another at a price

Essentials of Market: Buyers, sellers, goods,

Market competition, price, knowledge about the
market
Money Illusion
Money illusion refers to a tendency to consider only
the nominal value of money rather that its real
value, i.e. to think a dollar is a dollar, today,
tomorrow and the day after, instead of realizing that
after taking into account inflation, that dollar will
buy less in future.
 Word Meaning

Important Opportunity cost The amount or subjective value

that must be sacrificed in
Concepts choosing one activity over the
next best alternative

Utility How well a person’s need or

want is satisfied

Purchasing power  refers to the amount of goods or

services she can buy with the
currency.

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 Word Meaning

Important Form utility Changing raw material or

putting parts to make it useful
Concepts
Place utility Availability of a product
where a consumer can buy it

Time utility Availability of a product when

a consumer wants it

Possession Utility The benefit customers derive

from ownership of a
company's product once they
have purchased it

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 What is a Paradox

It is the situation where the variables fail to follow the generally

laid principles and assumptions of the theory and behave in an
opposite fashion.

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 diamond-water paradox

Paradox of Why do are often willing to pay more for

items we get very little use out of as
value compared to practical items we need for
everyday life.

Everyday items vs art work

 The Money Illusion is a book written by
economist Irving Fisher in 1928, who
introduced the concept.
Fisher starts out by giving a vivid example of
this illusion.
He describes a German woman shopkeeper
Money Illusion during a time when Germany was undergoing
massive depreciation of their currency (i.e. the
German mark was losing its value) due to
hyperinflation following World War I.
The shopkeeper thought she was generating a
profit because she sold shirts for more than
they cost her to purchase them the year before.

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 But, as Fisher describes, in terms of purchasing
power she actually lost money. 
Purchasing power refers to the amount of
goods or services she can buy with the
Money Illusion currency.
Nominal currency is money not adjusted for
inflation.
A real currency is adjusted to reflect inflation.

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 Let's say she bought the shirt in 1927 at 10
marks and sold it one year later in 1928.
During that time, lets say inflation averaged
100%, and the cost of her daily living expenses
Money Illusion increased in line with inflation.
Let's assume her living expenses were 5 marks
per day in 1927.
She sells the shirt and pockets a 5 mark profit.

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 If inflation had been 0% during that time, she
could fund one day's worth of living expenses
with the profit, but inflation has caused her
daily living expenses to double from 5 marks to
Money Illusion 10.
Her 5 mark profit then can only fund a half
day's worth of living expenses.
Even though she has shown a nominal gain of 5
marks, she has diminished purchasing power.

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 Now let's go through the same type of analysis
with Aunt Phoebe and Aunt Monica.
For Aunt Phoebe, her salary at the beginning of
the year could cover $50,000 / $10,000 = 5
Money Illusion years of living expenses.
After the 10% raise and 3% inflation, she can
cover $50,000 X 1.10 / $10,000 X 1.03 = 5.34
years of living expenses, so the salary increase
does represent an increase in purchasing
power.

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 At the beginning of the year, Aunt Monica's
salary also covers 5 years of living expenses:
$45,000 / $9,000 = 5 years.
After the 15% raise and 10% inflation, she can
cover $45,000 X 1.15 / $9,000 X 1.10 = 5.23
Money Illusion year of living expenses.
Aunt Monica's purchasing power has increased,
because her salary increase was greater than
the cost of living increase, but she didn't have
the purchasing power increase that her sister
Phoebe did.

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M O N E Y ILLUS IO N –
B R A IN FU NC T IO NS Money Illusion

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 Total amount of goods and services produced in a
year, calculated in terms of money

The National Income is the total amount of income

National accruing to a country from economic activities in a
year’s time. It includes payments made to all
Income resources either in the form of wages, interest, rent,
and profits.

The progress of a country can be determined by

the growth of the national income of the country
 Land - a shortage of fertile land for populations to grow food

Scarcity - Water scarcity - Global warming and changing weather, has caused some parts of the

refers to
world to become drier and rivers to dry up. This has led to a shortage of drinking water
for both humans and animals.

resources Labour shortages - insufficient workers to fill jobs

being finite Health care shortages. In any health care system, there are limits on the available
supply of doctors and hospital beds.

and limited Seasonal shortages. If there is a surge in demand for a popular Christmas present, it can
cause temporary shortages as demand as greater than supply and it takes time to
provide.

Fixed supply of roads. Many city centres experience congestion – there is a shortage of
road space compared to number of road users
Per Capita Income
Per capita income measures the average income earned per person in a
given area (city, region, country, etc.) in a specified year.

It is calculated by dividing the area's total income by its total population.

Per capita income is national income divided by population size.

Price
The price of goods plays a crucial role in determining an
efficient distribution of resources in a market system.
Production

How many
What to When to
to
produce? produce?
produce?
 Excess of total revenue over total costs.
◦ Accounting Profit
Profit ◦ Economic Profit
 Accounting profit is the net income that a company
generates, found at the bottom of its income
statement.
The figure includes all revenue the company
generates and deducts all expenses to arrive at the
bottom line.

Accounting Common sources of revenue include the sale of

goods and services, receipt of dividends or interest,
Profit and rental income, to name a few.
Common types of expenses include the cost of
goods sold, marketing and advertising expenses,
salaries and benefits, travel, entertainment, sales
commissions, rent, depreciation and amortization,
interest, and taxes.
 Economic profit differs quite significantly from
accounting profit.

Economic Instead of looking at net income, economic

profit considers a company’s free cash flow,
Profit which is the actual amount of cash generated
by a business.
 The standard of living is a measure of the
material aspects of an economy.
It counts the amount of goods and services
produced and available for purchase by a
person, family, group, or nation.
Standard of The standard of living is different from the
living quality of life. It doesn’t measure non-material
characteristics, such as relationships, freedom,
and satisfaction. These are part of the quality
of life. Indices that attempt to measure quality
of life also include the material standard of
living measurement.
 Supply is the quantity of a product that a
producer is willing to and is able to supply to
the market at a given price in a given time
period
Supply
 The 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.
Form utility refers to how well a product or service
meets the customer's needs.

Utility Time utility refers to the availability of a product so

that customers can buy it during the times that are
the most convenient or desirable for them. 
Place utility refers to making goods or services
physically available or accessible to potential
customers. E.g online
Possession utility is the amount of usefulness or
perceived value from owning a product. 
 Power of commanding other goods in exchange –
must have utility, scarity and transferability

Value in use:
The satisfaction you get from the use of a
commodity is known as the value-in-use, example
Value water
Value in Exchange:
It is the amount of goods and services which we
may obtain in the market in exchange of a
particular thing.
Thus, value-in-exchange depends on Time and
Place
 Desire

Need

Unlimited

Want Satiable

Alternative or Competitive (Bread – fruit)

Complementary ( Pen – Pen –Ink)

Recurring – Vary in intensity – Becomes a habit

Wealth
Anything that has value.

To have value the commodity must be scare and transferable

Welfare
WEALTH IS THE
MEANS, WELFARE IS
THE END
White good
Consumer durable – washing machine, fridge