Principles of Economics

(2+0)

Reference books:
1. Principles of Economics by P.N. Chopra
2. Modern Microeconomics by A. Koutsoyiannis
 Collection of notes, Study
materials and Books for 1st
Semester
Provided
By:

Technical Student Association of Nepal(TSAN) Lamjung Campus

Collected and Compiled by:
Kushal Poudel
Special Thanks to:
Ganesh Lamsal(V. President, TSAN Lamjung)
Basic concepts
Concepts on some terms important
in study of economics
1. Goods
 Anything capable of satisfying a want
 Desirable things like food, clothing, shoes, cars,
houses etc
 Something causes dissatisfaction or definite harm
to the consumer called economic bads
 Examples: liquor, tobacco, drugs
 Some good are free like sunlight, air and natural
water
 Others are paid like TV, clothes
Contd…
Classification/types of goods
a. Material and non-material
 Material goods
 Can transferred from one person to another
 Tangible in nature
 Example: motorbike, refrigerator
 Non-material goods
 These are services
Contd…
b. Economic and free goods
 Economic goods
 Produced by man and have price
 Supply is limited compared to demand (scarce)
 Example: food items, clothes
 Free goods: gifts of nature
 Plentiful in supply
 Have no market price
 Example: air, sunshine
 contd,…
c. Consumer and producer goods
 Consumer goods
 Meant for direct consumption-rice, fruits, pen
 Durable or perishable
 Durable: last for long time-many uses, not in daily demand-
 Example: cars, TV
 Perishable: single use, are in daily demand
 Example: milk, fruits
 Producer goods
 Bought by producers
 Mostly durable but single use also
 Example: raw material, production inputs, machines
Contd….
d. Public and private goods
 Public goods
 Owned and maintained by government
 Open for public use under some rules and
regulations
 Example: road, railways, public parks, bridges
 Private goods
 No free access for general public
 Example: private house, cars
 2. Utility
 Want satisfying power of a good
 Utility is not necessarily usefulness
 Utility does not always mean pleasure
 Utility is subjective
 same good have different utility to different person
 It is relative
 utility differs from time to time, from place to place
 Utility diminishes: “law of diminishing marginal utility”
 Cardinal and ordinal approach of utility
3. Value
 Prof. Taussig: “the value of a commodity means in
economics is its power of securing other
commodities in exchange.”
 It is the purchasing power of a good
 If the commodity is not exchangeable in the
market, it has no value
 Commodity has value only when it is in market
demand
Value differs from price
 Value is the inherent quality of a good, price is
what it can get in the market in terms of money
 Fresh air has great value but no price
 To have price a commodity must have three
things:
 Utility
 Scarce
 Transferable from one to another person
Contd…..
 Goods which are neither scarce nor transferable-
have a value-in-use only
 Water and air have value-in-use but no value-in-
exchange
 Value-in-exchange is called price
 4. Wealth
 Forguson: “all material and non-material goods which
have a market value are called wealth”.
 It is stock of all things which have market price
 Bonds, shares, cars, houses, land are wealth
 Sometimes, knowledge or skills also referred to as
wealth if these are used to earn some income
 But, in economics these are actually human capital
Contd….
 All goods which can produce income when used in
production are called capital
 Thus, all capital is wealth, but, all wealth is not
capital

 Private wealth: saving income in durable form by

individuals
 Government wealth: revenue collected and use to
built roads, bridges, communication
 Natural wealth: minerals, soils
6. Equilibrium
 Equilibrium is a term relating to a “state of rest”, a
situation where there is no tendency to change.
 In economics, equilibrium is an important concept
 Equilibrium analysis enables us to look at what factors
might bring about change and what the possible
consequences of those changes might be
 Market equilibrium occurs where the amount
consumers wish to purchase at a particular price is the
same as the amount producers are willing to offer for
sale at that price
 It is the point at which there is no incentive for producers or
consumers to change their behavior
 Graphically, the equilibrium price and output are found where
the demand cure intersects the supply curve

Price
S function

P1 Equilibrium point (the price at

which D function=S function)
D function
QD+S
Quantity bought and sold
 Mathematically, we can find the point where quantity
demanded (Qd) is equal to the quantity supplied (Qs)
Example:
 Assume the demand is: Qd=150-5P and Supply is:
Qs=90+10P
 In equilibrium we know that Qs=Qd
i.e. 90+10P=150-5P
Or, 10P+5P=150-90
Or, 15P=60
Or, P=4
 Therefore, equilibrium price is 4
Lets substitute this to get Qd and Qs
 We have, Qd=150-5P
=150-5×4
=130
 Similarly, Qs=90+10P
=90+40
=130

 Therefore, the equilibrium price is 4 and

equilibrium quantity bought and sold is 130
7. Consumption
 Direct use of goods and services for satisfying current
wants
 Process of use of utility
 Examples: Eating food, playing, driving a car
Types:
 Slow and fast consumption
 Durable goods are consumed slowly
 Perishable goods are consumed fast
 Direct and indirect consumption
 Food and car are consumed directly
 Fuel, cooking gas are consumed indirectly
Contd….
 Today’s consumption and tomorrow’s consumption
 Today’s: Consumed for satisfying present need
 Tomorrow’s: Keep reserve for future generation
 Consumption of good and service
 Goods: Food items, clothes, cars
 Services: Teachers, doctors services
 Useful and Wasteful consumption
 Useful: some usefulness
 Wasteful: Over eating, high dose of medicine
Contd…
 Individual and government consumption
 Individual: fulfill individual consumer’s need
 Example: eating food by consumer
 Government: meet nations need
 Example: government investment
 Consumption of consumers’ and producers’ good
 Consumers: Fruits, vehicles
 Producers: Inputs, raw materials
Contd….
 Consumption has great importance in economics
 Beginning and end of all economic activities
 It gives signal to the producer to produce goods
and services
8. Production
 Process of creation of utility
 Production of saleable goods is just the process of adding
utility to the raw materials
 Production is the process of value addition to the raw
materials
 Utility can be created/added by different methods:
 Form utility: iron in to tools
 Time utility: selling when high market price
 Place utility: transporting apple to terai
 Service utility: training to farmers in a farm
 Possession utility: cricket bat to the players
 Knowledge utility: searching new cultivar
Contd…

 Therefore, production has wider meaning than common

understanding
 manufacturing, providing training, searching for new
knowledge, transporting all are production
 Production has great importance in economic activities
 There will be no consumption without production
 It creates employment
 If production increases, country progresses