BASIC

DISCUSS ON
ECONOMICS
SIT DOLOR AMET
Your best quote that reflects your
approach… “It’s one small step for
man, one giant leap for mankind.”

- NEIL ARMSTRONG
Economics Concept # 1. Value:

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
1. Utility:

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

2. 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.

3. 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.
 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 prossess utility, scarcity and transferability. If it lacks
even one quality, it cannot be termed as 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.
Some differences:
Wealth is different from capital, income and money.
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.
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 ventories are stocks but change
in inventories in a flow.
 Circular flow of income
Households spend their income on:
(i) Payment for goods and services purchased from firms;
ADVERTISEMENTS:
(ii) Tax payments to government;
(iii) Payments for imports.
Firms:
Firms receive revenue from households, government and the foreign sector for sale of their goods and services. Firms also
receive subsidies from the government.
Firm makes payments for:
(i) Factor services to households;
(ii) Taxes to the government;
(iii) Imports to the foreign sector.
Government:
Government receives revenue from firms, households and the foreign sector for sale of goods and services, taxes, fees, etc.
Government makes factor payments to households and also spends money on transfer payments and subsidies.
Foreign Sector:
Foreign sector receives revenue from firms, households and government for export of goods and services. It makes payments for
import of goods and services from firms and the government. It also makes payment for the factor services to the households.
The savings of households, firms and the government sector get accumulated in the financial market. Financial market invests
money by lending out money to households, firms and the government. The inflows of money in the financial market are equal
to outflows of money. It makes the circular flow of income complete and continuous. The circular flow of income in a four-sector
economy is shown in Fig. 1.7
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