Introduction
Economics is the foundation of how societies allocate limited resources to meet human needs and wants. It explains how individuals, businesses, and governments make choices, how markets operate, and how national wealth is measured. This article introduces the core concepts of economics including needs, wants, demand, supply, market equilibrium, utility, consumption, and measures like GDP, GNP, and national income.
1. Needs and Wants
Needs
Needs are the state of self-deprivation in an individual. They are essential for survival and well-being.
- Types of needs: Physiological (food, water, shelter), social (belonging, affection), cultural, and individual (self-expression, knowledge).
- Key idea: Human needs are unlimited and form the foundation of marketing and economic activity. Without needs, markets could not exist.
Wants
Wants are specific desires that satisfy needs. While needs are universal, wants are shaped by culture, society, and personality.
For instance, the need for food may result in a want for rice, pasta, or pizza. Marketers influence wants by offering different options that satisfy the same need.
2. Demand and Supply
Demand
Demand refers to human wants backed by purchasing power and willingness to buy. It represents how much of a product people are ready to purchase at a certain price.
Conditions of demand:
- Desire for a commodity
- Ability to pay (purchasing power)
- Willingness to pay
The law of demand states that, other factors remaining constant, as the price of a good decreases, the demand for it increases — and vice versa.
Demand Schedule:
A table showing the relationship between various prices and the quantities demanded at those prices.
Demand Curve:
A downward-sloping line from left to right showing the inverse relationship between price and quantity demanded.
Supply
Supply is the quantity of goods or services that producers are willing and able to sell at a given price and time.
The law of supply states that as the price increases, suppliers are willing to offer more, and when price falls, supply decreases.
Supply Schedule:
A table showing the quantity of goods supplied at different prices.
Supply Curve:
An upward-sloping line from left to right, showing a direct relationship between price and quantity supplied.
3. Market Equilibrium
Market equilibrium occurs where the demand and supply curves intersect.
- The equilibrium price is where the quantity demanded equals the quantity supplied.
- The equilibrium quantity is the amount bought and sold at this price.
If the price is higher than equilibrium, there is excess supply (surplus).
If the price is lower, there is excess demand (shortage).
Market forces naturally push prices toward equilibrium over time.
4. Market and Its Types
Definitions
- Traditional definition: A place for regular exchange of goods and services.
- Marketing definition: A set of actual and potential customers for a product.
- Economic definition: A mechanism through which prices are determined by the interaction of buyers and sellers.
Classifications of Market
Based on Economics:
- Perfect Competition
- Imperfect Competition (Monopoly, Duopoly, Oligopoly, Monopolistic)
Based on Geography:
- Local Market
- National Market
- International Market
Based on Purpose:
- Consumer Market
- Industrial Market
5. Utility and Consumption
Utility
Utility is the capacity of a product to satisfy human needs.
It represents the inner power of a product that provides satisfaction.
- Example: The utility of water is to quench thirst; of food, to remove hunger.
Consumption
Consumption is the process of using goods or services to satisfy needs. It destroys or reduces the utility of a product.
6. Consumer Surplus and Producer Surplus
Consumer Surplus: The difference between what consumers are willing to pay and what they actually pay.
Producer Surplus: The difference between the selling price and the producer’s cost.
Total Surplus = Consumer Surplus + Producer Surplus
It represents the overall economic welfare generated in the market.
Graphically:
- Consumer Surplus lies above the market price and below the demand curve.
Producer Surplus lies below the market price and above the supply curve.
7. Law of Diminishing Marginal Utility
The Law of Diminishing Marginal Utility, proposed by Alfred Marshall, states that as a person consumes more units of a good, the additional satisfaction (marginal utility) gained from each extra unit decreases.
Example:
A thirsty man drinks glasses of water one after another. The first gives high satisfaction, the second less, and after several glasses, no satisfaction at all — possibly even discomfort.
Practical implication:
This principle helps businesses set prices — consumers are willing to pay less as they consume more of the same product.
8. Price vs Value
- Price is the amount paid to acquire a product.
- Value is the satisfaction or benefit a consumer receives from it.
Value depends on perception — how much the buyer believes the product is worth compared to its price.
Formula:
Value = Perceived Benefits ÷ Price Paid
9. GDP and GNP
Gross National Product (GNP)
GNP measures the total monetary value of all final goods and services produced by a nation’s citizens, whether at home or abroad, within one year.
Formula:
GNP = C + I + G + (X – M)
Where:
C = Consumption, I = Investment, G = Government Spending,
X = Exports, M = Imports
Gross Domestic Product (GDP)
GDP measures the market value of all final goods and services produced within a country’s borders in a year.
GDP = GNP – Net Income from Abroad
Both GDP and GNP help assess a nation’s economic strength
10. Factors of Production and Their Incomes
Factor of Production | Income Received |
Land | Rent |
Labour | Wages |
Capital | Interest |
Organisation/Entrepreneur | Profit |
These factors work together to produce goods and services and generate national income.
11. National Income and Per Capita Income
National Income
National income is the total income earned by all factors of production in a country.
It includes wages, rent, interest, and profit.
Per Capita Income
Per capita income indicates the average income of a person in a country during a specific period.
Formula:
Per Capita Income = National Income ÷ Total Population
It serves as a key indicator of economic welfare and living standards.
Conclusion
Economics revolves around the interaction between needs, wants, demand, and supply, and how resources are distributed to maximise welfare.
Through key principles such as market equilibrium, utility, and marginal analysis, economics explains how individuals make choices and how societies function efficiently.
By understanding concepts like GDP, GNP, and national income, one gains insight into a nation’s economic performance and the well-being of its people. These foundational ideas serve as the cornerstone of more advanced studies in engineering economics, business, and social sciences.
