CHAPTER-1

CONCEPTS OF ECONOMICS

1.1 ECONOMICS

Economics is a social science which studies how human beings make choices to use scarce resources to satisfy
their unlimited wants.
The term 'Economies' in English language has its origin in two Greek words: Olkos (household) and Ncmcln
(management). Thus, they "mean "management of household'. Wants of each household are unlimited but most
of the means to satisfy them, like food, cloth etc. are limited or scarce. Thus, faced with scarcity, people while
managing the household must make choice. People can not have everything that they want, so they have to
choose among the available alternatives. Because scarcity forces people to choose, economics is sometimes
called the science of choice - the science- that explains the choices that people make and predicts how changes
in elreumstances affect their choices.
Economics is the study of how human beings make choices to allocate scarce resources to tatlufy their
unlimited wants. In such a manner that consumers can maximise their satisfaction, producers can
maximise their profits and the society can maximise its social welfare.
Economists at different times have emphasised different aspects of economic activities, and have arrived at
different definitions of Economics. We shall now discuss some of these definitions in detail.
These definitions can be classified into four groups:
1. Wealth definitions,
2. Material welfare definitions,
3. Scarcity definitions, and
4. Growth-oentered definitions.

1.2 WEALTH DEFINITIONS

1.2.1 Adam Smiths Definition
Adam Smith considered to be the founding father of modern Economics, defined Economics as the study of the
nature and causes of nations wealth or simply as the study of wealth.
The central point in Smiths definition is wealth creation. Implicitly, Smith identified wealth with welfare. He
assumed that, the wealthier a nation becomes the happier are its citizens. Thus, it is important to find out, how a
nation can be wealthy. Economics is the subject that tells us how to make a nation wealthy. Adam Smiths
definition is a wealth-centred definition of Economics.

1.2.2 Main Characteristics of Wealth Definitions

1. Exaggerated emphasis on wealth: These wealth centered definitions gave too much importance to the
creation of wealth in an economy. The classical economists like Adam Smith, J.S. Mill, J.B. Say, and otheTk.
believed that economic prosperity of any nation depends only on the accumulation of wealth.
2. Inquiry into the creation of wealth: These definitions show that Economics also deals with an inquiry into
the causes behind the creation of wealth. For example, wealth of a nation may be increased through raising the
level of production and export.
2 PAPER 1: PRINCIPLES OF ECONOMICS AND BANGLADESH ECONOMY
3. A study on the nature of wealth: These definitions have indicated that wealth of a nation includes only
material goods (e.g., different manufactured items). Non-material goods were not included. Hence, non-material
goods like services of teacheTk., doctoTk., engineeTk., etc., are not considered as wealth.
1.3 MATERIAL WELFARE DEFINITIONS

1.3.1 Alfred MaTk.halls Definition

Alfred MaTk.hall also stressed the importance of wealth. But he also emphasised the role of the individual in
the creation and the use of wealth. He wrote: Economics is a study of man in the ordinary business of life.
It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and
on the other and more important side, a part of the study of man. MaTk.hall, therefore, stressed the
supreme importance of man in the economic system. MaTk.halls definition is considered to be material-welfare
centred definition of Economics.

1.3.2 Features of Material Welfare Definitions

The main features of material welfare-centred definitions are as follows:
1. Study of material requisites of well-being: These definitions indicate that Economics studies only the
material aspects of well-being. Thus, these definitions emphasise the materialistic aspects of economic welfare.
2. Concentrates on the ordinary business of life: These definitions show that Economics deals with the study
of man in the ordinary business of life. Thus, Economics enquires how an individual gets his income and how
he uses it.
3. A stress on the role of man: These definitions stressed on the role of man in the creation of wealth or
income.

1.4 SCARCITY DEFINITIONS

1.4.1 Lionel Robbins Definition

The next important definition of Economics was due to Prof. Lionel Robbins. In his book Essays on the Nature
and Significance of the Economic Science, published in 1932, Robbins gave a definition which has become
one of the most popular definitions of Economics. According to Robbins, Economics is a science which
studies human behaviour as a relationship between ends and scarce means which have alternative uses.
A long line of economists after Robbins, including Scitovsky and Cassel agreed with this definition and carried
on their analysis in line with this definition. It is a scarcity-based definition of Economics.

1.4.2 Main Features of Scarcity Definition

The principal features of scarcity definitions are as follows:
1. Human wants are unlimited: The scarcity definition of Economics states that human wants are unlimited. If
one want is satisfied, another want crops up. Thus, different wants appear one after another.
2. Limited means to satisfy human wants: Though wants are unlimited, yet the means for satisfying these
wants are limited. The resources needed to satisfy these wants are limited. For example, the money income (per
month) required for the satisfaction of wants of an
individual is limited. Any resource is considered as scarce if its supply is less than its demand.
3. Alternative uses of scarce resources: Same resource can be devoted to alternative lines of production. Thus,
same resource can be used for the satisfaction of different types of human wants. For example, a piece of land
can be used for either cultivation, or building a dwelling place or building a factory shed, etc.
4. Efficient use of scarce resources: Since wants are unlimited, so these wants are to be ranked in order of
priorities. On the basis of such priorities, the scarce resources are to be used in an efficient manner for the
satisfaction of these wants.
 Module A: Concepts of Economics and Demand Supply Analysis 3
5. Need for choice and optimisation: Since human wants are unlimited, so one has to choose between the most
urgent and less urgent wants. Hence, Economics is also called a science of choice. So, scarce resources are to be
used for the maximum satisfaction (i.e. optimisation) of the most urgent human wants.
1.5 GROWTH-ORIENTED DEFINITIONS

1.5.1 Modern Growth-Oriented Definition of Samuelson

In relatively recent times, more comprehensive definitions of Economics have been offered.
Thus, Professor Samuelson writes, Economics is the study of how people and society end up choosing, with
or without the use of money, to employ scarce productive resources that could have alternative uses to
produce various commodities over time and distributing them for consumption, now or in the future,
among various peTk.ons or groups in society. It analyses costs and benefits of improving patterns of
resource allocation. A large number of modern economists subscribe to this broad definition of Economics.

1.5.2 Features of the Modern Growth-Oriented Definition

1. Growth-orientation: Economic growth is measured by the change in national output over time. The
definition says that, Economics is concerned with determining the pattern of employment of scarce resources to
produce commodities over time. Thus, the dynamic problems of production have been brought within the
purview of Economics.
2. Dynamic allocation of consumption: Similarly, under this definition, Economics is concerned with the
pattern of consumption, not only now but also in the future. Thus, the problem of dividing the use of income
between present consumption and future consumption has been brought within the orbit of Economics.
3. Distribution: The modern definition also concerns itself with the distribution of consumption among various
peTk.ons and groups in a society. Thus, while the problem of distribution is implicit in the earlier definitions,
the modern definition makes it explicit.
4. Improvement of resource allocation: The definition also says that, Economics analyses the costs and
benefits of improving the pattern of resource allocation. Improvement of resource allocation and better
distributive justice are synonymous with economic development. Thus, issues of development of a less
developed economy have also been made subjects of the study of Economics.
To put it summarily, the modern definition of Economics is the most comprehensive of all the definitions. All
the issues that were highlighted in the earlier definitions are included here. In addition, the issues of
development of a backward economy, as well as those of growth in a mature capitalist economy, form part of
this definition. Economics as it stands today, is built on the basis of this comprehensive definition.

1.6 SCARCITY

1.6.1 Scarcity of What?

In economics, we always refer lo scarcity of resources (or the means) available to us for the satisfaction of our
wants. Imagine youTk.elf as the richest peTk.on on the earth. Still, do you have enough means/re sources to get
everything you wish to get? 'No' must be the obvious answer. Implying that resources you actually have are
always short of the desires you wish to fulfill. Scarcity of resources is a univeTk.al phenomenon. No individual
or nation- rich or poor, big or small - can ever escape the problem of scarcity.
1.6.2 What is Scarcity?
It is a situation when: Resources available for the satisfaction of our wants < Resources required for the
satisfaction of our wants

1.6.3 Scarcity Is a Relative Concept

Scarcity is a relative concept. There is nothing like absolute scarcity of resources. When we talk of scarcity we
always mean 'resources are scarce in relation to our wants'. Human wants are infinite; these relate to our wishful
thinking. We always wish, hope and pray to have more of things. Do we ever reach the point of final satisfaction
of our wants? Do we ever say that we do not need more money/ means' resources for the satisfaction of our
4 PAPER 1: PRINCIPLES OF ECONOMICS AND BANGLADESH ECONOMY
wants? Obviously never, unless we are seeking salvation and withdrawing from this world. Living in this world,
we always need more and more and keep chasing our desires, knowing well that these will never be fully
satisfied.
1.6.4 All Resources are not Equally Scarce all the Time
Definitely, resources are scarce. But all resources are not equally scarce all the lime. To produce a commodity
(say bread), a producer needs land, labour and capital, But land, labour and capital are not equally scarce. In
Bangladesh, labour is cheaper than capital (in terms of machines). Why? Because, scarcity of labour is less
compared to that of capital. Wc have plenty of labour within our domestic territory', while we have to import
the bulk of capital from rest of the world. It is because of this that price of labour (wage rate) is much cheaper in
Bangladesh compared to most countries of the world.
Why is labour unemployed in Bangladesh, if resources are scarce? This is basically because factoTk. of
production are jointly demanded. To produce a commodity, we always combine land, labour, capital and
entreprencuTk.hip. Since capital is more scarce, not much of labour can be combined with it. Accordingly, a
part of labour remains unemployed.

1.6.5. Why Scarcity is a Problem?

Scarcity is a problem not simply because resources are scarce in relation to our wants. It is also because
resources have alternative uses. If scarce land could be used only for the production of (say) wheat, where is the
problem, just grow wheat and relax. Problem arises because land can be put to alternative uses. You can grow
on it wheat or bajra or rice or you can construct on it residential buildings/ factory sheds. It is here that we face
the problem of what to do and what not.

1.6.6 Problem of Scarcity Causes the Problem of Choice

Because resources are scarce and have alternative uses, we must confront the problem of choice. You must
exercise choice among different options available to you. To illustrate, if there arc two options on the use of
land viz. (i) production of rice and (ii) production of wheat, you must exercise your choice whether to produce
rice or wheat or how much of rice and how much of wheat. Problem of choico is also called tho problem of
allocation of resources to allernative uses.
It needs emphasis that Scarcity and Choice are inseparable. They always go together. Wherever there is scarcity
(implying scarcity of resource having alternative uses). There has to be a choice. It relates to choosing among
alternative uses of the resources for the satisfaction of our wants.

1.7 BROAD SCOPE OF ECONOMICS

Because resources are scarce and have alternative uses, we must confront the problem of choice. The scope of
economics entails the identification of basic economic problems before any society and find out different
possible ways to solve those problems.

1.7.1 Economic Problem

The main economic problems faced by every society are:
1. Unlimited human wants,
2. Limited availability of resources to satisfy those wants, and
3. Fulfillment of unlimited wants with limited resources.
In any society, human wants are unlimited. If one want is satisfied, the other appeaTk. soon. For
instance, if the basic needs of human being (e.g., food, clothing and shelter) are satisfied then some secondary
needs appear very soon. These secondary needs may be social needs, i.e., need for attaining a social function,
need for fulfilling some social obligations, etc. However, in comparison with this unlimited human wants, the
resources required to satisfy such wants remain limited.
Thus, the main problem before any society is to satisfy the unlimited wants with limited resources. Here arises
the problem of choice or selection. It implies that every society has to arrange its requirements in order of
 Module A: Concepts of Economics and Demand Supply Analysis 5
priority. Then, with its limited resources, the society has to satisfy the human wants in order of priority. In
Economics, we try to analyse the causes behind these basic economic problems and find out possible ways to
solve the said problems.
1.7.2 Causes behind Economic Problems
The main causes behind the economic problems of any society are:
1. Unlimited human wants: Every human being requires varieties of goods and services for maintaining and
improving his or her standard of living. Whenever the basic needs of food, clothing and shelter are fulfilled then
the people feel that they want and need education, book, pen and pencil, eraser, chair, table, television, tape-
recorder, CD-player, computer, travel, sports, finer clothes, washing machine, and thousands of such items. In a
modern society, these wants are increased further in response to the pressures of fashion and advertising. These
wants appear one after another like untiring waves of the sea.
2. Limited resources for satisfying these wants: Production of various goods and services require resources
like land resources, mineral resources, forest resources, physical capital (e.g., machines, factory sheds, etc.) and
money capital, human resources (e.g., skilled man power), etc. However, compared to the unlimited wants for
various goods and services, these resources seem to be insufficient. It implies that even if all these available
resources are fully employed for producing various goods and services, only a small part of human wants can be
satisfied. So, scarcity of resources is an important reason behind the economic problem in any society.

1.7.3 Three Main Economic Questions

In recent times, economists have analysed economic systems from a broad peTk.pective.
These modern economists talk about three main economic problems:
(1) What to produce;
(2) How to produce and
(3) For whom to produce.
In short, these are called the What, How and for Whom questions.

1.8 WHAT TO PRODUCE?

The very important question that any economic system must answer is: What goods and services are to be
produced in a society and in what quantities?
This question arises from the fact that human wants are unlimited, while resources are limited. The satisfaction
of human wants requires the consumption of goods and services. Human beings, therefore, wish to consume
goods and services. But, since resources are limited, the economic system cannot produce all types of goods and
services. Even any particular good or service cannot be produced in an infinitely large quantity. Only finite
amounts of a limited number of goods and services can be produced. Therefore, there arises this decision
problem. The economy must decide which goods and services to produce and which goods and services to
exclude from production.
The economy must choose its production plan carefully. Everything cannot be produced and even
those things which are produced cannot be produced in unlimited quantities.

1.9 HOW TO PRODUCE?

The second basic problem that every economy must solve is that of deciding how to produce the goods and
services (that the economy has decided to produce). A particular quantity of a particular good or service can be
produced in many different ways. The economy must choose a particular way of producing the specified
amount of the good. Moreover, this must be done for each of the different goods and services that the economy
wants to produce.
1.9.1 Choice of Techniques
In the language of the economists, a particular way of producing a particular good or service (or a set of goods
and services) is called a technique of production. For instance , in some cases, a particular amount of a
6 PAPER 1: PRINCIPLES OF ECONOMICS AND BANGLADESH ECONOMY
particular good can be produced by different combinations of inputs. Thus, it may be that 10 tons of wheat can
be produced either on 2 hectares of land by 5 agricultural workeTk. or on 4 hectares of land by 2 workeTk.
Here, there are two techniques for producing 10 tons of wheat: (2 hectares of land, 5 workeTk.) and (4 hectares
of land, 2 workeTk.). An economy which has decided to produce 10 tons of wheat must choose between these
two techniques. There is a similar problem for every good (or every set of goods). Therefore, the question how
to produce is also known as the problem of choice of techniques.

1.10 FOR WHOM TO PRODUCE?

Suppose now that the fiTk.t two basic problems have been solved i.e., the economy has decided the amounts of
production of various goods and services and has also chosen the appropriate techniques for producing them.
There still remains the problem of deciding the manner in which the produced goods and services will be used.
That will, obviously, be used to satisfy human wants. But among the membeTk. of society, who will receive
how much of the produced commodities? In other words, after the commodities have been produced, there
remains the task of deciding how they will be distributed. Who will get (to consume) the produced
commodities? This is known as the question: For whom to produce? It is also known as the problem of
distribution.

1.11 OPPORTUNITY COST

Opportunity Cost is the cost of choosing one opportunity in terms of the loss of next-best opportunity.
Opportunity Cost is the highest valued alternative foregone in the pursuit of an activity Opportunity cost is a
one of the most fundamental concepts used in the study of economics. An opoortunity cost can be either
explicit, usually involving a monetary payment, or implicit, which does not involve a transaction. Opportunity
cost is also commonly terned economic cost.
Illustration: Using a given piece of land (and other inputs), you may have the following opportunities (or
possibilities) of production:
Opportunity 1: 10 ton of rice (worth Tk. 10.000)
Opportunity 2: 12 ton of wheat (worth Tk. 12.000)
Opportunity 3: 25 ton of sugarcane (worth Tk. 15.000)
Opportunity 4: 05 ton of peanuts (worth Tk. 20.000)
Being a rational producer (aiming at maximisation of returns), you will choose opportunity 4, using land (and
other inputs) for the production of peanuts worth Tk. 20,000. Choice of opportunity 4 causes loss of
opportunities 1,2, and 3. So obvious, because with the given resources only one opportunity can be availed, not
more. Opportunity 3 (offering 25 ton of sugarcane worth Tk. 15,000) is the 2nd best, also called next best
opportunity. Comparing opportunity 4 with opportunity 3 we find that loss of 25 ton sugarcane (worth Tk.
15,000) is the maximum loss that you are suffering when you are choosing opportunity 4 (which happens to be
the best opportunity). This maximum loss of 25 ton sugarcane (worth Tk. 15,000) is the opportunity cost of
using land (and other given inputs) for the production of peanuts.

1.12 PRODUCTION POSSIBILITY CURVE AND MARGINAL OPPORTUNITY COST

PPC (Production possibility curve) is a curve showing different possibilities (or different combinations) of
production of a set of two goods with the given resources and given technology. Resources have alternative
uses, we know that. Accordingly, a piece of land (alongwiih other inputs) may be used for the production of
wheat and/or rice. If the farmer decides to produce both wheat and rice, he may think of various possible
 Module A: Concepts of Economics and Demand Supply Analysis 7
combinations of wheat and rice. More of wheat would obviously imply less of rice (and vice versa) because
resources are given and technology is constant. Production possibility curve in such a case is graphic
description of all the possible combinations of wheat and rice which are technically possible with the given
resources and technology.

Illustration
Suppose an economy decides to produce only two goods, namely wheat and cloth, with its available
resources. If all the resources arc used for the production of wheat alone then 100 lakh ton of wheat can be
produced. On the contrary, if all the factors of production are used for the production of cloth alone then 4,000
bales of cloth can be produced. If the economy produces both the goods, then within these limits, various
combinations of two goods can be produced. Table 1 shows different possibilities of production of wheat and
cloth. It is called production possibility schedule.
Table I. Production Possibility Schedule
Goods Production Possibilites
Wheat (Lakh ion) A B C D E
100 90 70 40 0
Cloih ('000 bales) 0 1 2 3 4
The above schedule shows that if production is carried out under 'A' combination, then 100 lakh ton of wheat
alone will be produced without any production of cloth. On the contrary, if production is obtained under 'E'
combination then 4,000 bales of cloth alone will be produced without any production of wheat. Besides these
extreme limits, there are many alternative possibilities of production of wheat and cloth. For instance, under 'B'
combination it is 90 lakh Ion of wheat and 1,000 bales of cloth; under 'C combination it is 70 lakh ton of wheat
and 2,000 bales of cloth and under 'D' combination it is 40 lakh ton of wheat and 3,000 bales of cloth.
Representing these various production possibilities on a graph, we get production possibilities curve as in fig. I.

Fig. 1
In fig. 1 the quantity of cloth is represented on OX-axis (Horizontal Axis) and wheat on (Vertical Axis). The
first production possibility is 100 lakh ton of wheat and no cloth. This is marked as A in Fig. 1. Similarly points
B, C and D represent different combinations of wheat and cloth. Point E represents production possibility of
4000 bales of cloth and no wheat. By combining all these points we get the curve in a row AE. II Is the
production possibility or transformation curve.

1.12.1 Attainable and Unattainable Combinations

Production Possibility Boundary separates attainable combination (of output) from unattainable combination (of
output) of a set of two goods produced with the given resources and technology. Fig. 2 illustrates this situation.
All points on the Production Possibility Boundary (like a, b, c and d), as well as all points within the Production
Possibility Boundary (like e and f) are attainable combination of output with the given resources and
technology. In other words, any point within the shaded region indicates attainable combinations of output of
goods X and Y. Any point outside the Production Possibility Boundary (like p and q) or any point outside this
shaded region indicates unattainable combination of output.
8 PAPER 1: PRINCIPLES OF ECONOMICS AND BANGLADESH ECONOMY

Fig. 2

1.12.2 Efficient and Inefficient Utilisation of Resources

If an economy happens to be anywhere on the Production Possibility Boundary, it is a situation of efficient
utilisation of resources. In such a situation, production of one good can be increased only by decreasing the
production of the other good. On the other hand, if any economy happens to be somewhere within the
Production Possibility Boundary, it is a situation of inefficient utilisation of resources or a situation when some
of the available resources remain unemployed. Fig. 3 illustrates the situation.

Fig. 3
Points b and c on the Production Possibility Boundary show a situation of efficient utilisation of resources. If an
economy wants to move from point b to point c, it could increase its production of good-X by ac, only by
sacrificing the output of good-Y by ab. Likewise; movement from c to 6 would mean increase in output of
good-Y by ab but not without a simultaneous decrease in output of good-X by ac.
Point a in the figure shows a situation of inefficient utilisation of resources. How? Because moving from point
a to point c, you ate able to increase the output of good-X by ac without decreasing the output of good-Y.
Likewise moving from point a to point 6, you arc able to increase the output of good-Y by ab without
decreasing the output of good-X. In other words, resources must be inefficiently utilised if output of one good
can be increased without decreasing output of the other good.

1.12.3 Growth of Resources or Growth In Production Capacity

An economy may generate more resources through greater human efforts, that is, it may add to its stock of
capital (in terms of machines or production plants) or it may discover more resources as a free gift of nature (in
terms of more gold, iron or silver). Eithenvay, it is enhancing its capacity to produce. Accordingly its
Production Possibility Boundary must shift to the right Fig. 4 illustrates this situation.
ab is the initial Production Possibility Boundary, while cd is the Production Possibility Boundary after
the growth of resources. Production Possibility Boundary shifts to the right, indicating that when production-
 Module A: Concepts of Economics and Demand Supply Analysis 9
capacity enhances, production of both the goods is enhanced. Now there is a wider range of attainable
combination.

Fig. 4
Shaded area in Fig. 4 shows additional attainable combination after the growth of resources, or after production-
capacity enhancement.

1.12.4 Improvement In Technology

Improvement in technology enables us to get more output from the same quantities of resources. Intact,
technological progress is defined as increase in the quantity of output that can be produced from a given input
of resources. Fig. 5 shows two possibilitics of improvement in technology: (i) the technological progress affects
the production of both wheat and cloth. Accordingly, Production Possibility Boundary would shift from PP to
P1P1 (ii) technological improvement occurs in the production of wheat only. In this situation the new Production
Possibility Boundary would be like the dotted line P2P. It may be noted in this context that the technological
improvement, even though it is limited to one product, still enables us to have more of both products.

Fig. 5
Increased productivity of agriculture makes it possible to increase the output of wheat, releasing some resources
from farming which can be employed to raise the output of cloth.

1.12.5 Marginal Opportunity Cost

Geometrically, it refers to slope of production possibility curve.
10 PAPER 1: PRINCIPLES OF ECONOMICS AND BANGLADESH ECONOMY

Fig. 6
cd Y
Slope of PPC at point c in Fig. 6 is the ratio when some resources are shifted from the de AX
de X
production of good-Y to good-X. This is exactly what marginal opportunity cost means. It is the loss of output
of good-Y when resources arc shifted from good-Y to the production of one additional unit of good-X.
Marginal Opportunity Cost refers to the loss of output of good-Y when some resources are withdrawn from the
Y
production of good-Y to produce one more unit of good-X. Marginal Opportunity Cost =Slope of PPC.
X
1.12.6 Marginal Opportunity Cost tends to Rise
When resources are continuously withdrawn from (he production of good-Y to produce more and more of good-
X, loss of output of good-Y, for every additional unit of good-X tends to increase. Implying
Y
that the ratio tends to rise as resources are shifted AX from Y to X. Rising marginal opportunity cost
X
Y
implies AX increasing slope of PPC. Accordingly, PPC is always concave to the origin.
X

1.13 WHAT IS INVISIBLE HAND?

It simply means pursuit of self-interest If there is no interference or no command by the government, every
individual in the economy would be guided by self-interest. For the producers it means maximisation of
revenue, minimisation of cost and therefore, maximisation of profits. For the consumer it means maximisation
of satisfaction from the basket of goods and services that he chooses to buy with his given income.
Pursuit of Self-interest (or Hidden Hand) Automatically Solves the Problems of What, How and For
Whom to Produce
In pursuit of self-interest price mechanism would work as the guiding principle.What to produce? Obviously,
the producers would allocate their resources to the production of those goods in case of which prices have the
tendency to rise (following the pressure of demand). This would mean maximisation of profits.

1.14 BRANCHES OF ECONOMICS: NATURE OF ECONOMIC SCIENCE

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Economic theory, as it stands today, has several branches. Of these, two are most important. These are
microeconomics and macroeconomics. We shall now briefly mention the major features of these two branches
to have an idea regarding the nature of economics.

1.14.1 Microeconomics
Microeconomics is that branch of economics which is concerned with the decision-making of a single unit of an
economic system. How does an individual (or a family) decide on how much of various commodities and
services to consume? How does a business firm decide how much of its product (or products) to produce? These
are the typical questions discussed in microeconomics. Determination of income, employment, etc.

1.14.2 Usefulness of Microeconomics

1. Determination of demand pattern: The study of microeconomics has several uses. It determines the pattern
of demand in the economy, i.e., the amounts of the demand for the different goods and services in the economy,
because the total demand for a good or service is the sum total of the demands of all the individuals. Thus, by
12 PAPER 1: PRINCIPLES OF ECONOMICS AND BANGLADESH ECONOMY
determining the demand patterns of every individual or family, microeconomics determines the demand pattern
in the country as a whole.
2. Determination of the pattern of supply: In a similar way, the pattern of supply in the country as a whole,
can be obtained from the amounts of goods and services produced by the firms in the economy.
Microeconomics, therefore, determines the pattern of supply as well.
3. Pricing: Probably the most important economic question is the one of price determination. The prices of the
various goods and services determine the pattern of resource allocation in the economy. The prices, in turn, are
determined by the interaction of the forces of demand and supply of the goods and services. By determining
demand and supply, microeconomics helps us in undeTk.tanding the process of price determination and, hence,
the process of determination of resource allocation in a society.
4. Policies for improvement of resource allocation: As is well-known, economic development stresses the
need for improving the pattern of resource allocation in the country. Development polices, therefore, can be
formulated only if we undeTk.tand how the pattern of resource allocation is determined. For instance, if we
want to analyse how a tax or a subsidy will affect the use of the scarce resources in the economy, we have to
know how these will
affect their prices. By explaining prices and, hence, the pattern of resource allocation, microeconomics helps us
to formulate appropriate development policies for an underdeveloped economy.
5. Solution to the problems of micro-units: Finally, it goes without saying that, since the study of
microeconomics starts with the individual consumeTk. and produceTk., policies for the correction of any wrong
decisions at the micro-level are also facilitated by microeconomics. For example, if a firm has to know exactly
what it should do in order to run efficiently, it has to know the optimal quantities of outputs produced and of
inputs purchased. Only then can any deviation from these optimal levels be corrected. In this sense,
microeconomics helps the formulation of policies at the micro-level.
In every society, the economic problems faced by different economic agents (such as individual consumeTk.,
produceTk., etc.) can be analysed with the help of microeconomic theories. This shows that economics is a
social science which aims at analysing the economic behaviour of individuals in a social environment.

1.14.3 Limitations of Microeconomics

However, microeconomics has its limitations as well:
1. Monetary and fiscal policies: Although total demand and total supply in the economy is the sum of
individual demands and individual supplies respectively, the total economic picture of the country cannot
always be undeTk.tood in this simplistic way. There are many factoTk. affecting the total economic system,
which are outside the scope of microeconomics. For example, the role of monetary and fiscal policies in the
determination of the economic variables cannot be analysed completely without going beyond microeconomics.
2. Income determination: Microeconomics also does not tell us anything about how the income of a country
(i.e., national income) is determined.
3. Business cycles: A related point is that, it does not analyse the causes of fluctuations in national income. The
ups-and-downs of national income over time are known as business cycles. Microeconomics does not help us in
undeTk.tanding as to why these cycles occur and what the remedies are.
4. Unemployment: One of the main economic problems faced by an economy like Bangladesh is the problem
of unemployment. This, again, is one of the areas on which microeconomics does not shed much light. Because,
if we are to find a solution to the unemployment problem, we must fiTk.t undeTk.tand the causes of this
problem. For that, in turn, we must undeTk.tand how the total employment level in the economy is determined.
This is difficult to undeTk.tand from within the confines of microeconomics.
 Module A: Concepts of Economics and Demand Supply Analysis 13

1.14.4 Macroeconomics
Macroeconomics is that branch of economics which is concerned with the economic magnitudes relating to the
economic system as a whole, rather than to the microeconomic units like individuals or firms. It has, therefore,
been called aggregative economics. In the picturesque language of Kenneth Boulding, Macroeconomics deals
... not with individual income but with national income, not with individual prices but with the price level, not
with individual outputs but with national output.

1.14.5 Importance of Macroeconomics

Why is the study of macroeconomics important? To put it briefly, macroeconomics deals with some of the
questions untouched by microeconomics. The study of economics is, therefore, left incomplete, if we do not
study macroeconomics. Some of the important issues analysed in macroeconomics are the following:
1. Income and employment determination: The determination of national income and of total employment in
the country are vital concerns of macroeconomics. Since the volume of unemployment is simply population
minus the number of people employed, unemployment is determined as soon as the employment level is known.
2. Price level: The determination of the general price level is discussed in macroeconomic theories. Upward
movement of the general price level is known as inflation. Thus, if we want to undeTk.tand the process of
inflation and find ways of controlling it, we must resort to the study of macroeconomics.
3. Business cycles: The economic booms and depressions in the levels of income and employment follow one
another in a cyclical fashion. While income rises and employment expands during boom periods, they shrink
during depressions. Since depressions bring business failures and unemployment in their wake, economists have
sought remedies to depressions. Discussion of business cycles in general and anti-depression policies in
particular, fall within the scope of macroeconomics.
4. Balance of payments: The balance of payments theory is also a part of macroeconomics. The difference
between the total inflow and the total outflow of foreign exchange is known as the balance of payments of a
country. When this balance is negative (i.e. outflow exceeds inflow), the country faces a lot of economic
hardships. The causes and remedies of such balance of payments problems are discussed in macroeconomics.
5. Government policies: The effects of various government policies on the economic variables like national
income or the general price level are also studied in macroeconomics. [It should be noted that, we are talking of
the macroeconomic effects of government policies. The effects of these policies on the micro-units (for
instance, the effects of taxes on the output of an individual firm), are the subject-matter of microeconomics.]
Since, the Government occupies an important position in any modern economic system, the analysis of these
effects is of obvious importance.
6. Interrelations between markets: Probably, the most important contribution of macroeconomic theories is to
show that different markets of the economic system (for example, the commodity market, the labour market, the
bond market, the money market, etc.) are interrelated. Any disturbance in one of these markets affects all the
otheTk. (Again, it should be noted that, it is the interrelation between the macroeconomic markets that we are
talking about here. The relationship between the markets of the individual commodities is the subjectmatter of
general equilibrium theory, which is a part of microeconomics).
Thus, we see that the study of microeconomics and that of macroeconomics are complementary to each other.
The limitations of microeconomics are covered by macroeconomics. On the other hand, macroeconomics does
not make a detailed study of the individual consumer or producer. This is taken care of by microeconomics. One
can hope to form a comprehensive notion of what economics is all about only when one is acquainted with both
microeconomics and macroeconomics.
14 PAPER 1: PRINCIPLES OF ECONOMICS AND BANGLADESH ECONOMY

1.14.6 Differences between Microeconomics and Macroeconomics

We can now indicate some of the important differences between Microeconomics and Macroeconomics. This is
shown in Table 1.1 and Chart 1.
Table 1.1: Differences between Microeconomics and Macroeconomics
Microeconomics Macroeconomics
1. It is that branch of economics which deals with the 1. It is that branch of economics which deals with
economic decision-making of individual economic aggregates and averages of the entire economy, e.g.,
agents such as the producer, the consumer, etc. aggregate output, national income, aggregate savings
and investment, etc
2. It takes into account small components of the whole 2. It takes into consideration the economy of any
economy. country as a whole.

3. It deals with the process of price-determination in case 3. It deals with general price-level in any economy.
of individual products and factoTk. of production.

4. It is known as price theory (since it explains the 4. It is also known as the income theory (since it
process of allocation of economic resources along explains the changing levels of national income in any
alternative lines of production on the basis of relative economy during any particular time period.)
prices of various goods and services.)

5. It is concerned with the optimisation goals of 5. It is concerned with the optimisation of the growth
individual consumeTk. and produceTk. (e.g., individual process of the entire economy.
consumeTk. are uulity-maximiseTk. while individual
produceTk. are profit-maximiseTk.)

6. It studies the flow of economic resources or factoTk. 6. It studies the circular flow of income and expenditure
of production from any individual owner of such between different sectoTk. of the economy (say,
resources to any individual user of these resources, etc. between the firm sector and the household sector.)

7. Microeconomic theories help us in formulating 7. Macroeconomic theories help us in formulating

appropriate policies for resource allocation at the firm appropriate policies for controlling inflation (i.e., rising
level. price-level). unemployment, etc

8. It takes into account the aggregates over homogeneous 8. It takes into account the aggregates over
or similar products (e.g., the supply of steel in an heterogeneous or dissimilar products (say, the Gross
economy.) Domestic Product of any country during any year.)

1.15 ECONOMIC GOODS, FREE GOODS, AND ECONOMIC BADS

Economic good
A good is said to be an economic good (also known as a scrace good) if the quantity of the good demanded
exceeds the quantity supplied at a zero price. In other words, a good is an economic good if people want of it
that would be available if the good were available for free.
Free good
 Module A: Concepts of Economics and Demand Supply Analysis 15
Agoodissaidtobeafreegoodifthequantityofthegoodsuppliedexceedsthequantitydemandedatazero
price.Inotherwords,agoodisafreegoodifthereismorethanenoughavailableforeveryoneevenwhenthe
goodsisfree.Economicstsarguethattherearerelativelyfew,ifany,freegoods.

Economic bad
Anitemissaidtobeaneconomicbadifpeoplearewillingtopaytoavoidtheitem.Examplesofeconomic
badsincludethingslikegarbage,pollutionandilleness.
1.16 FACTORS OF PRODUCTION

Goodsthatareusedtoproduceothergoodsorservicesarecalledeconomicresources(andarealso
knownasinputsorfactorsofproduction).Theseresourcesareoftencategolizedintothefollowing
groups.
1.Land.
2.Labor.
3.Capitaland
4.Enterpreneurialability.
Thecategoryof"land"includesallnaturalresources.Thesenaturalresourcesincludethelanditself,
as well as any minerals, oil deposits, timber, or water that exists on or below the ground. This
categoryissometimesdescribedasincludingonlythe"freegiftsofnature,"thoseresourcesthatexist
independentofhumanaction.
Thelaborinputconsistsofthephysicalandintellectualservicesprovidedbyhumanbeings.The
resourcecalled"capital"consistsofthemachineryandequipmentusedtoproduceoutput.Notethat
theuseoftheterm"capital"differsfromtheeverydayuseofthisterm.Stocks,bonds,andother
financialassetsarenotcapitalunderthisdefinitionoftheterm.
Entrepreneurialabilityreferstotheabilitytoorganizeproductionandbearrisks.Yourtextdoes
nomnst this as a sparate resource, but insted considers it as a type of labor input. Most other
introductorytexts,though,listthisasaseparateresource.(No,yourtextisnotwrong,itjustusesa
differentwayofclassifyingresources.Ithinkit'sbetter,though,tostickwiththesomewhatmore
standardclassificationinthiscourse.)
Theresourcepaymentassociatedwitheachresourceislistedinthetablebelow.
EconomicResource ResourcePayment
land rent
labor wages
capital interest

1.17 COMPARISON BETWEEN MARSHALL'S AND BOBBINS' DEFINITIONS

After making a detailed study of Material Welfare definition by Marshall and Scarcity
definition by Bobbins, let us make a comparison between Marshall's, and Robbins' definitions. We find some
points of similarities as well as dissimilarities between these definitions.

1.17.1 Similarities
Some points of similarities are described as under:
16 PAPER 1: PRINCIPLES OF ECONOMICS AND BANGLADESH ECONOMY
1. Main Focus on Man: Marshall and Robbins both have given main focus on the study of mankind.
2. Rational Behaviour of Man: Both definitions are based on the assumption that man is rational. He tries to
miximise his satisfaction or welfare.
3. Wealth and Scarce Means: According to the Marshall's and Robbins' definitions wealth and scare means have
the same meaning though terminology is different. So both definitions are similar from this point of view.
4. Economics Is a Science: Both Marshal) and Robbins consider economics as a science. Marshal) gives its
name as normative science whereas Robbins considers economics as positive science.

1.17.2 Dissimilarities
Major difference between the definitions given by Marshall and Robbins are
as under
Marshall's Definition (Material Welfare)
(1) Marshall has divided human activities in two parts:
material and non-material. Economics studies only
those material activities which enhance human
welfare.
(2) Economics is a social science.
(3) Economics alms at increasing human welfare.
(4) Besides positive and normative science, economics
is also an art.
(5) The definition given by Marshall is simple and
practical.
(6) Marshall's definition is classificatory.
(7) Marshall's definition is a narrow definition. Only
material goods have been studied in it
(8) It is not of universal character.
Robbins Definition (Scarce Means)
(1) Robbins has not made such a division between the
human activities. According to him. all activities
dealing with the scarce means are the economic
activities.
(2) Economics is a human science.
(3) Economics does not deal with human welfare.
(4) Economics is only a real science.
(5) The definition given by Robbins is difficult and
Impractical.
(6) Robbins' definition is analytical.
(7) Robbins' definition is exhaustive. All sorts of
meansmaterial and non-materialhave been studied
in it.
(8) It is universal in nature as it is applicable to all
societies having limited means and unlimited wants.

1.18 SCARCITY AND EFFICIENCY ARE TWIN THEMES OF ECONOMICS

Scarcity occurs where it's impossible to meet all unlimited the desires and needsof the peoples with limited
resources i.e; goods and services. Society must needto find a balance between sacrificing one resource and that
will result in gettingother.
Efficiency denotes the most effective use of a society's resources in satisfyingpeoples wants and needs. It means
that the economy's resources are being usedas effectively as possible to satisfy people's needs and desires.
Thus, the essence of economics is to acknowledge the reality of scarcity and thenfigure out how to organize
society in a way which produces the most efficient useof resources.

1.19 POSITIVE AND NORMATIVE ECONOMICS

1.19.1 Positive Economics

Positive economics is the study of what and why an economy operates as it does. It is also known as Descriptive
economics and is based on facts which can be subjected to scientific analysis in order for them to be accepted.
It is based on factual information and uses statistical data, and scientific formula in determining how an
economy should be. It deals with the relationship between cause and effect and can be tested.
Positive economic statements are always based on what is actually going on in the economy and they can either
be accepted or rejected depending on the facts Normative Economics
 Module A: Concepts of Economics and Demand Supply Analysis 17

1.19.2 Normative economics

Normative economics is the study of how the economy should be. It is also known as Policy economics wherein
normative statements like opinions and judgments are used. It determines the ideal economy by discussion of
ideas and judgments.
In normative economics, people state their opinions and judgments without considering the facts. They make
distinctions between good and bad policies and the right and wrong courses of action by using their judgments.
Normative economic statements cannot be tested and proved right or wrong through direct experience or
observation because they are based on an individual opinion.
Although these two are distinct from each other, they complement each other because one must first know about
economic facts before he can pass judgment or opinion on whether an economic policy is good or bad.

1.20 GOODS

1.20.1 Goods
Any thing that can satisfy a human want is called a "good" in economics, Goods may be commodity or services;
they satisfy human wants which are starting point of all economic activity. A physical, tangible item or product
used to satisfy wants and needs. A good is produced using society's resources and represents a fundamental
aspect of the economy. Limited resources are used to produce the goods that satisfy unlimited wants and needs
in an ongoing effort to address the the problem of scarcity.
As used in economics, the word "good" undobutedly can be traced to the more common usage--something that
is positive or beneficial. In that a "good" provides satisfaction and in so doing makes the consumer better off, it
is a "good" thing to have. In fact, an item that has a negative impact on satisfaction, such all pollution or crime,
is often referred to as a "bad". Goods include all those material as well as nonmaterial things which have utility.
Consumable item that is useful to people but scrace in relation to its demand, so that human effort is required to
obtaint it. So anything having the capacity to stisfy human wants may be termed as goods. Water, food, clothing,
shelter, chairs, surface of the earth are the example of material goods.

1.20.2 Kinds of Goods

As a fundamental concept of economic activity, the term serves in a number of contexts with a number of
different adjective modifiers. Here is a short list for your consderation: The classification of goods cans be done
in diffrent ways as discussed below.
1. Economic goods and Free Gods : Free goods are those goods that exist in such plenty that can be used as
such as we like. They are gift of nature an used without payment e.g. Air, sunshine etc, with out payment e.g.
Air, sunshine etc. The economic goods, on the other hand, are scarce and can be had only on payment. They are
limited and generally man made and hence those can be available only on payment. In Economics, we are
concerned with economic goods. Economic goods mean wealth. Thus there would have been no science of
economics if all goods had been free goods. The distinaction between free goods and economic roods, of course
is not permanent, for instance air is free goods but when we recive in under fan it is economic goods.
2. Consumption Goods and Capital Goods : Consumption goods are those which yield, satisfaction directly.
They are used by consumer directly to satisfy the wants e.g. food, clothing, etc (First order goods), Capital
goods are these goods which help us to produce other goods especially raw materials are called as intermediate
goods. For instance machinery fixed in factory is capital goods but the cotton used as raw material is
intermediate goods. Thus, the consumption are also referred as consumer's good while capital goods and
intermediate goods are termed as producers goods.
3. Material Goods and Non-meterial Goods : Material good are concrete in nature e.g. building, furniture,
books etc. While different services a human being is using called non material services. E.g. services of
teachers, Doctor, advocate etc.
18 PAPER 1: PRINCIPLES OF ECONOMICS AND BANGLADESH ECONOMY
4. Transferable and Non Transferable Goods : Most of the material goods can be transferable. Here
transferable means change in ownership e.g. land, vehicle etc. On the contrary non-transferable goods referred
to personal quilites like skill, intelligence etc, which never be transferred.
5. Personal and Impersonal Goods : Personal goods refer to personal qualities of person and tey are non
material and exist inside him e.g. skill, intelligence etc. They are also called as internal goods. Th impersonal
goods are generally material goods and not personal goods. For example land furniture, vechcle etc. They are
external and lie outside and hence they are also called external goods. In Short, personal goods indicate "what
he is" and impersonal goods" What he has"
6. Necessaries, Comforts and Luxuries : Goods can be classified as Necessaries- like food, cloth, shelter, etc.
Comfort-table, electricity and Luxuries - Air Condition, vehicle, T.V., Gold & Silver, Jewellery etc.
7. Scarce Good : Scarce good is synonymous term for economics good. The adjective "scarce" emphasizes that
the good has limited availability relative to desired use, reflecting the pervasive problem of scarcity.
8. Final Good : A good that is available for pruchase by the ultimate or internded user with no plans for further
transformation or as an input in the production of other goods for resale.
9. Intermediate Good : Intermediate Good is a good that is used as an imput in the production of a final good.
10. Normal Good : Normal good is a good in which an increase income causes an incrase in market demand.
11. Private Good and Public Good : A good that can be exchanged through markets because it is rival in
consumption and non payers can be excluded from gaining control, which makes market exchanges virtually
impossible.
A good that is generally provided by government because it is non rival in consumption and non payers cannot
be excluded from gaining control.
Private goods refer to individual property e.g. Building land, vehicle etc. which are possessed by an individual.
The public goods like railway, rods, dams etc. are owned by society. They are common to all and owned by
society collectively.
12. Near - Public Good : Near public Good is a good that is generally provided or at least regulated by
government because it is non-rival in consumpition, even though non-payers can be excluded from gaining
control.
13. Common -Property Good : Common-Property Good is a good that is generally provided or at least
regulated by government because even though it is rival in consumption, non-payers cannot be excluded from
gaining control.
Although this list is lenthy, it is but a tip of the iceberg. A more complete list would also inclued capital good,
consumption good, superior good, luxury good, Giffen good, durable good, nondurable good, and--- well--a
whole lot more.

1.21 COMPETITION IN ECONOMICS

Competition in economics is rivalry in supplying or acquiring economic service or good. Sellers compete with
other sellers, and buyers with other buyers. In its perfect form, there is competition among many small buyers
and sellers, none of whom is to large to affect the market as a whole; in practice, competition is often reduced
by a great variety of limitations, including copyrighting, patents, and governmental regulation, such as fair trade
laws, minimum wage laws, and wage and price controls.
In general, the actions of two or more rivals are in pursuit of the smae obejective. In the context of markets, the
specific objective is either selling goods to buyers or alternatively buying goods from sellers. Competition tends
to come to come in two varieties--- competition among the few,which is market with a small number of sellers
(or buyers), such each seller (or buyer) has some degree of market control, and competition among the many,
which is a market with so many buyers and sellers that none is able to influecne the market price or quantity
exchanged.
 Module A: Concepts of Economics and Demand Supply Analysis 19

1.22 LAISSEZ FAIRE

The notion that government should not intervene into production, consumption, and exchange activities and that
the private sector (households and business) Should be free to make allocation decisions. Laissez faire is
afrence term that roughly translates into "allow to act." It has been the rallying cry for many people (primarily
business leaders) who oppose govenment intervention, regualtion, or even taxation since it was popularized in
the late 1700s by Adam Smith in The Wealth of Nations. Laissez faire is based on the belief that individual
choices and volutary market exchanges are sufficeient to achieve an efficient allocation of resources. It is often
used synonymously with the term free enterprise and forms a cornerstone of many conservative economic
policies.

1.22 UTILITY
Utility is usefulness, the ability of something to satisfy needs or wants. Utility is an important concept
in economics and game theory, because it represents satisfaction experienced by the consumer of a good. Not
coincidentally, a good is something that satisfies human wants and provides utility, for example, to
a consumer making a purchase. It was recognized that one can not directly measure benefit, satisfaction
or happiness from a good or service, so instead economists have devised ways of representing and measuring
utility in terms of economic choices that can be counted. Economists have attempted to perfect highly abstract
methods of comparing utilities by observing and calculating economic choices. In the simplest sense,
economists consider utility to be revealed in people's willingness to pay different amounts for different goods.

1.22 VALUE

Quite simply, this is the amount of consumer stisfaction directly or indirectly obtained form a good, service, or
resource.The more a good satisfies a person's want or need, then the more valuable it is to that person.
Furthermore, different people are likely to place different values on a good. Resources are valuable to the
degree taht they are used to produce stuff that consumers want. The botton line is that value, like beauty, is truly
in the eye of the beholder.

1.23 WEALTH

1.23.1 Wealth
Wealth is the net ownership of material possessions and productive resources. In other words, it is the difference
between pysical and financial assets that you own and the liabilities that you owe. Wealth includes all of the
tangible consummer stuff that you possess, like cars, houses, clothes, jewlry, etc, : any financil assets, like
stocks, bonds, bank accunts, that you lay claim to; and your ownership of resources, including labor, capital,
and natural resources. Of course, you must deduct any debts you owe.
All materal things are produced by labor for the satisfaction of human desies and having exchange value.
This means that wealth must have all of these characteristics :
Wealth is material. Human qualities such as skill and mental acumen are not material, hence cannot be
classffied as wealth.
Wealth is capable of satisfying human desire. Money is not wealth; it is a medium of exchange whereby wealth
can be acquired. Nor are shares of stock, bonds or other securities classifiable as wealth. They are but the
evidences of ownership. None of these satisfy desire directly; if they are destroyed, the sum total of wealth is
not decreased.
Wealth has exhange value.
20 PAPER 1: PRINCIPLES OF ECONOMICS AND BANGLADESH ECONOMY

1.23.2 Kinds of wealth

1. Individual wealth : In includes all possessins of an individual. The things that and individual possesses may
be material goods like land, buildings, etc. and non-material goods like goodwill of a business.
2. Collective wealth : In consitsts of all material and non-material public property. Collective wealth is
collectively possessed and enjoyed by all the members of a society. As for example, roads, public buildings, etc,
belong to this class.
3. National wealth : In includes the individual as well as the collective wealth of the country. Computing
national wealth, foreign assts of the country must be included and domestic assts of foreigners should be
decuted.
4. Personal wealth : Marshall uses the term personal wealth to include internal qualities of a person. In
includes energies faculties, habits and business connections of an individual.

1.24 WANTS

1.24.1 Wants
Man is a bundle of desires. His wants are infinite in variety and number. Some waants are natural, for example
foods, air, clothing and shelter with whcih existence of man's life is not possible, Simialarly wants vary from
individual to individual and they multiply with civilization.

1.24.2 Characteristics of human wants

Ans : 1. Human wants are unlimited : Man's mind is so made that he never completly satisfied and hence
there is no end to human wants. One want is satisfied another want will crop up to take its place and thus it is
never ending cycle of want.
2. Any particular want satiable : Though the wants are unlimited, but is possible to satisfy a particular want,
provided has the means (resource).
3. Wants are complementary : It is a common experience that we want things in groups. A single article out of
group can not satisfy human wants by it self. It needs other things to complete its use e.g. a motor-car needs
petrol and mobile oil starts working. Thus the relationship between motor-car and petrol is complementary.
4. Wants are competitive : Some wants competes to other. We all have a limited amount of moeny at our
disposal; therefore we must choose some things and reject the other. E.g. sugar, tea and coffee.
Some Wants are both complimentary and competitive. Use of machinery is done the use labour needs to be
reduced. This indicates competitive nature. But to run the machinery the labour is also required and as such it
indicates complimentary relationship.
5. Wants are alternative: There are several ways of stisfying a prticular want. If we feel thirsty, we can have
water, lassi, in summer while cofee, tea in winter. The final choice depends upon availability of moeny and the
relative prices.
6. Wants vary with time place and person: Wants are not always the same. It varies with individual to
individual. People want different things at different times and in different places.
7. Wants vary in Urgency and Intensity: All wants are not equally urgent and in tense. Some wants are urgent
while some are less urgent.
8. Whants multiply with civilization: With the advancement the wants multiply. Therefore the wants of people
living in urban area are more than the villagers. With civilization the demand for radio, T.V, motor-car etc, are
incresing.
9. Wants are recur: Some wants are recurring in nature, e.g. food we require again and again. Wants change
into habits : If a prticular want is regularly satisfied a person become used to it and it gorws into habit e.g.
smoking of cigrate and use of drugs.
 Module A: Concepts of Economics and Demand Supply Analysis 21
Wants are influenced by income, salesmanship and advertisement: It income is higher more wants can be
satisfied. Many things we buy of particular brands due to salesmanship or advertisment.
Want are the result to custom or convention. As a part of cusmtom and convention we buy many thins. Really
they are not required but unlikely we have to purchase it e.g. expeses on social ceremonies.
10. Present wants are more important than future wants : Future is uncertain and hence man is more
concerned with the satisfaction of the present wants rather than future wants.

1.24.3 Classfication of wants

The wants can be classified as under.
Necessaries : These can be sub divided as
1. Necessaries of existence : The things without which we can not exist e.g. water, food, clothing, shelter.
2. Conventional necessaries : Conventional necessaries are the things which we are forced to use by social
custom.
3. Comforts : After satisfying our necessaries we desire to have some comforts. For example table and chair for
a student help to increase the effiency. But cushioned costly chair is not a confort.
4. Luxuries : After means superflous consumption. After getting comforts, man desire luxury. The luxury
articles need not required e.g. gold and silver, costly furniture, etc.

1.25 PERSONAL INCOME AND DISPOSABLE INCOME

Personal income (PI) is the total income recived by the members of the domestic household sector, which may
or may not be erned from productive activities during a given period of time, usually one year.
Disposable income (DI) is the total income that can be used by the household sector for either consumption or
saving during a given period of time, usually one year. Disposable income is after-tax income that is officially
calculated as the difference between personal income and personal tax and non-tax payments. In the numbers
game, personal tax and non-tax payments are about 15% of personal income, which makes disposable personal
income about 85% of personal income.

1.26 NATIONAL INCOME AND PERSONAL INCOME

National income (NI) is the total income eraned by the citizens of the national economy resulting fromn their
ownership of resources used in the production during a given period of time, usually one year.
Personal income (PI) is the total income received by the members of the domestic household sector, which or
may not be earned from productive activities during a given period of time.

1.27 SAVING

Saving is the after-tax disposable income of the household sector that is not used for consumption expenditures.
In general terms, saving is the use of income to purchase legal claims through financial markests rather than the
direct purchase of physical goods and services. In the macroeconomic world modeled by the circular flow,
saving is the diversion of household income away from consumption and into the financial markets. In this
model, saving is a priamry source of funds used for business investment expenditures for capital goods. Saving
is also used to finance government expenditures.

1.28 INVESTMENT
22 PAPER 1: PRINCIPLES OF ECONOMICS AND BANGLADESH ECONOMY
Investment is the sacrifice of current benfits or rewards to pursue an activity with expectations of greater furter
benefits or rewards. Investment is typically used to mean the purchase of capital by business in anticipation of
the profit. By increasing the quantity or quality oif resources, investment is a source of economic growth. While
investment, in priinciple is diverse, in practice, the official government measure, as reported by the Department
of Commerce, includes business' purchases of capital and consumer's purchases of new houses.dsddsdad

1.29 CONSUMPTION

The use of resorces, goods, or servisers to sastisfy wants and needs. At the macroeconomic level, consumption
is reflected as expenditures by the household sector on gross domestic prodcut. At the microeconomic level,
consumption is important to utility, demand, and market exchanges. Consumption is the ultimate goal of
economic activity.
Comsumption is the process in which people use goods or services to satisfy their wants and needs. It is
motvated by the unlimited wants and needs aspect of scarcity. A hungry person eats a club sandwich for lunch.
A cold person turns up the thermostat on the furnace. A board person watches television. A tired person spends
the night at a motel. Each is an act of consumption. Each act of consumption satisfies wants or needs.
Such consumption acts are important to microeconomics and especially market demand. The consumption of a
club sandwich to imcroeconomics and the purchase of a club sandwich, or at least the meat, bread, cheese, and
other ingredients needed for preparation. How much club sandwich consumpton occurs denpends on the
satisfaction obtained and the price paid.
Such acts are also important to macroeconomics. He much income the household sector devotes, in total, to the
purchase of goods, such as club sandwiches, used for consumption affects short-run business-cycle instabiltiy
and long-run economic grwth.

1.30 LAND
One of four basic categories of resources, or factors of production (the other three are labor, capital, and
entrepreneurship). This category includes the natural resources used to produce goods and services, including
the land itself the minerals and nutrients in the ground; the water, wildlife, and vegetation on the surface; and
the air above.
The naturally occurring resouces used in the production of goods and services, including the land itself, the
minerals and nutrients in the ground; the water, wildlife, and vegetation on the surface; and the air above. Land
also includes the productive dimensions of space and accessibility. This is one of four basic categories of
resources, or factors of prodduction. The other three are labor, capital, and entrepreneurship.
Land is, first and foremost, the souce of all materials used to produce tangible goods. This resource category
includes everything that is transformed by labor, capital, and entrepreneurship into more valuable goods.
Without land, there are no goods.

1.31 PRODUCTIVITY
In enonomics, a measure of productive efficiency calculated as the ratio of waht is produced to what is required
to produce it. Any of the tradional factors of production- land, labour, or capital-can be used as the denominator
of the ratio, though productivity to calculations are actully seldom made for land or capital since their capacity
is difficult to measure. Labour is in most cases easily qqantied -for exapmple, by counting workers engaged on
a particular product. In industrialized nations, the effects of increasing productivity are most apparent in the use
of labour. Productivity can be seen not only as a measure of effciency but also as an indicator ofeconomic
development. Prodductivity increases as a primitive extrative economy developmemt into to thechonologically
sphisticated one. The pattern of increase typically exhibits long term stability interrupted by sudden leaps that
represent major technolical advances. Productivity in Europe and the U.S. made great strides following the
development of such thechnologies as steam power, the railroad, and the gasoline motor. Later in the 20th
 Module A: Concepts of Economics and Demand Supply Analysis 23
century, advances in productivity staemmed from a number of innovations, including assembly lines and
automation, computer-integrated manufactring, database management systems, just-in-time manufacturing, and
just-in time inventory mangement. Increases in productivity have tended to led to long-term increases in real
wages.

1.32 INPUT

The resources or factors of production used in the production of a firsm's output. This term is most firequently
associated with the analysis of short-run production, and is often modified by the terms fixed and variable, as in
fixed input and variable input. In the short run, th quantity of a fixed input can not be changed, meaning it can
not be used to expand output. In contrast, a variable input can be changed, making it THE means of expanding
output in the short run.

1.33 OUTPUT

Output is a generic term for a tangible good or an intangible service that is the end result of the
production/resource transformation process. This notion of output, which also goes by the alias product, usually
surfaces in the contex of analyzing the short-run production of a firm. The short-run relation between a variable
input and output is of particular interest because it revals the law of diminishing marginal returns. This law
indicates that additional quantities of a variable input, when added to a fixed input, have decresing marginal
products, or marginal returns.

1.34 THREE PRODUCTIVE DIMENSIONS

Land actually has three productive dimensions. In addition to the naturally occuring materials, land also
provides spce and accessibility.
1. Materials: The obvious dimension of land is the provision of naturally occuriring materials, the materials
that provide the "substance" of tangible products. The materials needed to build a house, for example, include
lumber for the walls, asphalt shingles for the roof, plastic pipe for the plumbing, and copper wire for the
electrical system. All of these materials originate with the land--vegetation growing on the land, and minerals
found in the ground. No land, no raw materials, no goods.
2. Space: A second, not obvious, dimension of land in space. In other words, land provides a place to "put
things." Every THING needs to be some PLACE, with emphasis on the word PLACE. Land is the resource used
for this storage function. The spatial strage aspect of land is often augmented with capital (for exapmple, a
warehouse), but it begins with land. Land, for example, provides the space, the surface area, to construct a
house.
3. Accessiblility: The third, and also somewhat obscure, dimension of land is location or accesibility
Everythings is loacated relative to other things. Some are closer, some are father away. Closer locations require
fewer scace resouces (and thus incur less opportunity cost) for transportation. Because resources are used to
transport as well as to transform, accessibiliy and close location reduce the opportunity cost of transportation. A
house that is located closer to school, work, and shopping is usually preferred because transportation cost is
less.
24 PAPER 1: PRINCIPLES OF ECONOMICS AND BANGLADESH ECONOMY

EXERCISE-1
1. Define Economics.
2. What are the wealth definitions of Economics? What the main features of wealth definitions?
3. What is the material welfare definition of Economics? What the main features of material welfare
definitions?
4. What is the scarcity definition of Economics? What the main features of scarcity definitions?
5. What is the growth-oentered definition of Economics? What the main features of growth-oentered
definitions?
6. What is Scarcity?
7. Scarcity is a Relative Concept- Explain.
8. All Resources are not Equally Scarce all the Time- Explain.
9. Why Scarcity is a Problem?
10. Problem of Scarcity Causes the Problem of Choice- Explain.
11. What are the basic economic problem of a socity? What are the causes behind these economic problems?
12. What do you mean by opportunity cost?
13. What is production possibility curve(PPC)?
14. What do you mean by marginal opportunity cost?
15. What invisible hidden in economics?
16.BrieflyexplainthetwobranchesandmanyFieldsofEconomics.
17. Briefly mention the major features of these two branches to have an idea regarding the nature of economics.
18. Define Microeconomics.
19. What are the usefulness of Microeconomics?
20. What are the limitations of Microeconomics?
21. Define Macroeconomics
22. What are the usefulness of Macroeconomics?
23. What are the limitations of Macroeconomics?
24. Differenciate between Microeconomics and Macroeconomics?
25. What do you mean by economic good?
26. What do you mean by free good?
27. What do you mean by economic bad?
28. What are the factors of production?
29. Compare between Marshall's, and Robbins' definitions.
30. Define scarcity and efficiency.
31. Define Positive Economics and Normative Economics.
32. Define goods? How can we classify goods?
33. What do you mean by competition in economics?
34. What is Laissez Faire?
35. Define utility.
36. Definewealth. How can we classify wealth?
37. What is Wants? What are the characteristics of human wants? Classfyn of wants.
38. What is personal income (PI)?
 Module A: Concepts of Economics and Demand Supply Analysis 25
39. What is disposable income (DI)?
40. What is national income (NI)?
41. what is personal income (PI) ?
42. Define Saving, Investment and Consumption.
43. What do you mean by Land? Brifly explain the productivity of land.
44. Define input and output?