Basic Concepts and Definitions

Utility

Definition: 
Utility in economics refers to the satisfaction or benefit that a consumer derives from consuming a product or service. It is a subjective concept as it varies from person to person depending on their tastes, preferences, and circumstances.

 Key Features:

• Subjective: What gives utility to one person may not give utility to another.

• Relative: It changes with time and context.

• Cardinal vs. Ordinal Utility: Some economists try to measure utility in units (utils), while others only rank preferences.

• Law of Diminishing Marginal Utility: As more units of a good are consumed, the additional satisfaction derived from each additional unit decreases.

 Example:

• The first cup of coffee in the morning gives you high satisfaction (utility). The second or third might give less satisfaction.

• A person who is allergic to dairy will get zero or negative utility from milk.

Commodity

Definition: 
A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. They are typically produced and sold by many companies and are uniform in quality.

 Characteristics:

• Standardized: Quality does not vary significantly.

• Tradable: Bought and sold on exchanges.

• Fungible: Interchangeable regardless of producer.

 Examples:

• Agricultural commodities: wheat, rice, cotton.

• Metals: gold, silver, iron.

• Energy commodities: crude oil, natural gas.

• Livestock: cattle, pork bellies.

Services

Definition: 
A service is a non-physical, intangible economic activity that provides value to the consumer without resulting in ownership of anything.

 Features:

• Intangible: Cannot be touched or stored.

• Perishable: Consumed at the time of delivery.

• Involves human effort: Skill, experience, or labor.

 Examples:

• Education services (teaching in schools).

• Legal services (provided by lawyers).

• Transport services (metro, Uber).

• Healthcare services (treatment by doctors).

Consumption

Definition: 
Consumption is the process of using up goods and services to satisfy human wants. It is the end-purpose of economic activity.

 Types:

• Direct Consumption: When goods are consumed to satisfy immediate wants (e.g., eating food).

• Indirect Consumption: When goods are used to produce other goods (e.g., using flour to bake bread).

 Examples:

• Buying vegetables for dinner (consumption).

• A car buyer who uses the car for personal use is consuming; a taxi company buying cars for business is investing.

 Special Note:

Economists often study the consumption function – the relationship between income and consumption.

Production

Definition: 
Production is the process of creating goods or services by transforming inputs (resources) into outputs that satisfy human wants.

 Inputs:

• Land

• Labour

• Capital

• Entrepreneurship

 Types of Production:

1. Market Production: Goods produced for sale in the market.
2. Public Production: Goods/services produced by government bodies.
3. Household Production: Goods/services produced for own use (e.g., home gardening).

 Examples:

• A farmer growing wheat.

• A baker making bread in a commercial kitchen.

• Software development for a client company.

Income

Definition: 
Income is the money received by individuals or firms as a return for their contribution to the production process.

Types:

• Personal income: Salaries, wages, pensions, interest.

• Business income: Profits earned by businesses.

• National income: Total income of the entire economy.

 Examples:

• A doctor earning ₹1,50,000 monthly.

• A shopkeeper earning profit from his grocery store.

• A firm’s income from selling products and services.

Wealth

Definition: 
Wealth refers to the stock of valuable economic resources possessed by an individual, business, or country.

 Characteristics:

• Measured at a point in time.

• Includes physical (land, buildings) and financial assets (stocks, bonds).

• Net wealth = Total assets − Liabilities.

Examples:

• A person owning 2 houses, gold jewelry, shares, and having no loans is wealthy.

• A country’s total wealth includes its infrastructure, natural resources, and foreign investments.

Economic Equilibrium

Definition: 
Economic equilibrium is a state where market supply and demand balance each other, and as a result, prices become stable.

 Types:

• Market Equilibrium: Quantity demanded = Quantity supplied.

• General Equilibrium: All markets in the economy are in balance.

• Nash Equilibrium: Used in game theory; each player's strategy is optimal given others' strategies.

 Example:

• If 100 pens are demanded at ₹10 and producers supply exactly 100 pens at that price, the market is in equilibrium.

Economic and Non-Economic Goods

 Economic Goods:

• Have a price.

• Are scarce and require resources to produce.

• Involve opportunity cost.

Examples:

• Electricity, bread, clothing, mobile phones.

 Non-Economic Goods (Free Goods):

• Available free of cost.

• Do not require human effort to produce.

• Abundant in nature.

Examples:

• Air, sunlight, rainwater in natural environments.

Relative Nature:

• Air is free → becomes an economic good when purified in hospitals.

• River water → becomes economic when treated and piped into homes.

Economic and Non-Economic Wants and Activities

Economic Wants:

• Involve money or purchasing.

• Related to goods/services that have utility and price.

Examples:

• Desire for a new phone, laptop, house.

 Non-Economic Wants:

• Related to emotions, sentiments, or feelings.

• Do not involve money or market exchange.

Examples:

• Want for affection, peace, social recognition.

Human Activities:

Economic Activities:

• Done with the aim of earning income or creating wealth.

Examples:

• Practicing medicine, selling vegetables, teaching at a private school.

Non-Economic Activities:

• Done out of love, care, duty, social service.

Examples:

• A mother feeding her child.

• Donating blood or volunteering at an orphanage.

Scarcity

Definition: 
Scarcity refers to the limited availability of resources compared to the unlimited wants of individuals and societies.

 Implications:

• Necessitates choice.

• Involves opportunity cost.

• Foundation of all economic problems.

Real-Life Examples:

1. Land Scarcity: Urban areas like Mumbai facing high land prices due to limited land.
2. Water Scarcity: Rajasthan faces droughts and acute drinking water shortages.
3. Labour Scarcity: Skilled worker shortages in AI and >Healthcare Scarcity: In rural India, few doctors, leading to high wait times and limited access.
4. Traffic Scarcity: Congestion in Delhi due to inadequate road capacity.
5. Product Scarcity: iPhones sold out quickly during launch – more demand than supply.