The concept of costs and benefits is related to the theory of rational choice (and rational expectations) that economics is based on. While having a basic understanding of economic theory isn't perceived as being as important as balancing a household budget or learning how to drive a car, the forces that underpin the study of economics impact every moment of our lives. When we buy a product, we … A stock variable does not involve the specification of any particular length of time. A rotten egg has no utility because it cannot be exchanged for anything. Furniture used in the home is wealth but given on rent is capital. University students perform cost-benefit analyses on a daily basis by choosing to focus on certain courses that they've deemed more important for their success. Economics is a social science; it is "social" because basic economic theory examines people and their behavior, and "science" because the concept of economics entails hypothesis formation, testing, mathematical modeling and equations. Wants are a means of expressing a perceived need. Price is value expressed in terms of money. Scarcity explains the basic economic problem that the world has limited—or scarce—resources to meet seemingly unlimited wants. Its value is ascertained at some point in time. Change in any variable which can be measured over a period of time relates to a flow. Wants - Simply the desires of citizens. Goods which are owned by the society are called social or collective wealth, such as schools, colleges, roads, canals, mines, forests, etc. Thus there can be a general rise or fall in prices. Financial wealth is excluded from national wealth. Wealth owned by an individual is called private or individual wealth such as a car, house, company, etc. As a result, you can charge more for beer and make more money on average by using wheat to make beer than by using wheat to make flour. If one pen is equal to two pencils and one pen can be had for Rs.10. are scarce and have value. It means that the value of pencils has fallen. the same). Let it be 1 pen= 4 pencils. Thus utility is the value-in-use of a commodity. Value: Ordinarily, the concept of value is related to the concept of utility. Four key economic concepts—scarcity, supply and … For example, poorly structured performance bonuses have driven some executives to take measures that improve the financial results of the company in the short-time—just enough to get the bonus. Thus optimisation is the determination of the maximisation or minimisation of an objective function. But in economics, the meaning of price is different from that of value. Goods which have value are termed as wealth. In common use, the term ‘wealth’ means money, property, gold, etc. Needs: These are basic requirements for survival like food and water and shelter. Within a couple of days, he sees production numbers shoot up from 10,000 to 15,000 bottles per day. In this sense, in ventories are stocks but change in inventories in a flow. If it lacks even one quality, it cannot be termed as wealth. Rationing is the practice of controlling the distribution of a good or service in order to cope with scarcity. Only so much of a given good can be made because of the scarcity of wheat. Some of the basic concept of economics are as follows: Economics Concept # 1. Choice: In simple term this is the most important economic concepts & fundamental for understanding economics. But in economics it is used to describe all things that have value. As a result of scarce resources, humans are constantly making choices that are determined by their costs and benefits and the incentives offered by different courses of action. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. All economic goods like pen, book, etc. Some people want bread and some would prefer beer. ON the other hand, when the increasing scarcity of raw materials or inputs for a given good drive costs up and producers to cut back on supply, then the price they charge for he good rises, and consumers have an incentive to conserve on their consumption of that good and reserve it's use for their most highly valued uses. These practices include profit sharing, performance bonuses, and employee stock ownership. How do we decide how much flour should be made for bread and beer? Although economics assumes that people are generally rational, many of the decisions that humans make are actually very emotional and do not maximize our own benefit. The scarcity principle is an economic theory in which a limited supply of a good results in a mismatch between the desired supply and demand equilibrium. When we use water to quench our thirst, it is the value-in-use of water. Privacy Policy3. But capital is that part of wealth which is used for further production of wealth. So national income is a flow and national wealth is a stock. Then the price of one pen is Rs.10 and the price of one pencil is Rs.5. The offers that appear in this table are from partnerships from which Investopedia receives compensation. It means that there cannot be a general rise or fall in values, but there can be a general rise or fall in prices. Share Your PDF File If you are a parent, a boss, a teacher, or anyone with the responsibility of oversight, you've probably been in the situation of offering a reward—or incentive—in order to increase the likelihood of a particular outcome. Similarly, a producer wants to produce the most suitable level of output to maximise his profit, given the raw materials, capital, etc.