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SOCIOLOGY & BUILDING ECONOMICS - MODULE 4
MODULE 4: SYLLABUS
● Economics and the market: Production and Consumption, wants and needs and their
characteristics. Concepts of economics: Opportunity cost; Laws of supply and
demand; Laws of increasing, diminishing and constant returns; Standard of living.
Analysis of the housing market in Indian cities to understand the dynamics of urban
housing supply and demand in formal and informal settlements. Analysis of
affordable housing.
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CONSUMPTION
Consumption refers to the process of utilizing goods and services to satisfy human wants. It
involves the use of resources, leading to a change in their utility. Here’s a more detailed
exploration of the concept:
Definition
● Consumption is the act of using up commodities and services to fulfill our needs and
desires.
● Economists often describe consumption as the “destruction of utility.” This means that
when we use a product (e.g., eating an apple), we do not destroy its physical
substance but rather alter its usefulness to us. The utility is "destroyed" in the sense
that the good can no longer serve its original purpose once consumed.
● Alfred Marshall: He referred to consumption as “negative production,” emphasizing
that while it involves the use of goods, it also signifies a reduction in their available
utility.
● Prof. Ely: Defines consumption broadly as the use of economic goods and services
to meet human needs. This includes both tangible goods and intangible services.
● Prof. A. L. Mayers: Describes consumption as the direct and final use of goods or
services to satisfy human wants. This highlights its role as the endpoint in the
economic process.
Characteristics of Consumption
Consumption plays a crucial role in economics, and its characteristics help us understand its
implications and nuances. Here are the important characteristics of consumption:
1. Destruction of Utility: Consumption involves the alteration of an item’s utility rather
than its physical destruction. When a good is consumed, its ability to satisfy wants is
diminished or destroyed, even though the physical item may still exist in some form.
2. Satisfaction of Human Wants: The primary purpose of consumption is to satisfy
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Compiled by Prakruthi S Karadagi, Faculty, RVCA
human wants. If an action does not fulfill a want or need, it cannot be considered
consumption. Satisfaction is a key indicator of effective consumption.
3. Direct Satisfaction of Wants: Consumption should provide immediate satisfaction.
For example, drinking water to quench thirst is a direct form of consumption. This
immediate link between the good or service and the satisfaction of a want is vital.
4. Rate of Reduction of Utility: The utility of a good can diminish at varying rates.
Some goods may lose their utility quickly (like perishable food), while others may
have a slower rate of utility decline (such as using a scooter or television over time).
5. Consumption of Services: Consumption is not limited to physical goods; it also
encompasses services. Activities such as teaching, medical treatment, and personal
care represent consumption of services, which are integral to fulfilling various needs.
Needs
Needs refer to the essential requirements necessary for human survival and well-being.
They encompass various dimensions and have evolved over time. Here’s a closer look at
the concept of needs:
Needs are fundamental requirements that are crucial for an individual's health and survival.
They can be categorized into different types, reflecting the complexity of human existence.
Types of Needs
1. Personal Needs: These include basic biological requirements such as food, water,
and air, which are vital for physical survival.
2. Psychological Needs: These involve emotional and mental well-being, including the
need for love, belonging, and self-esteem. Meeting these needs is crucial for mental
health.
3. Cultural Needs: These reflect the norms, values, and practices of a society. Cultural
needs can include language, traditions, and practices that help individuals connect
with their communities.
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4. Social Needs: These encompass the need for social interaction and relationships.
Humans are inherently social beings, and fulfilling these needs is essential for overall
well-being.
5. In ancient times, the primary needs of humans were:
● Food: Essential for nourishment and energy.
● Clothing: Necessary for protection and comfort.
● Shelter: Required for safety and security.
6. Modern Needs: With advancements in society, additional needs have emerged that
significantly impact the quality of life:
● Education: Critical for personal development, skills acquisition, and
empowerment.
● Healthcare: Essential for maintaining physical and mental health.
Wants
In economics, wants are defined as desires for goods and services that individuals wish to
possess, either immediately or in the future. Unlike needs, which are essential for survival,
wants are more flexible and reflect personal preferences. Here’s a closer look at the concept
of wants:
Definition: These are the desires for specific goods or services that enhance quality of life
but are not essential for survival. Wants can lead to demand for products and services in the
economy.
Characteristics of Wants
1. Wants are not essential for survival. Individuals can live without satisfying their wants,
though doing so may affect their quality of life.
2. Wants can vary significantly from person to person and can change over time.
Factors such as age, income, culture, and personal experiences influence what
individuals desire.
3. Human wants are essentially unlimited. As one want is satisfied, new wants emerge.
This ongoing cycle drives consumption and economic activity.
4. While wants are unlimited, the means to satisfy them (such as income, time, and
resources) are limited. This scarcity forces individuals to prioritize their wants and
seek alternatives.
5. The existence of wants drives businesses to produce goods and services that fulfill
those desires. Understanding consumer wants is crucial for companies in
determining what products to offer and how to market them.
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Understanding the Relationship Between Needs and Wants: In economics,
understanding the distinction between needs and wants is crucial for making informed
decisions regarding resource allocation, consumption, and overall economic behavior.
Here’s a closer look at their relationship:
Primary Wants: Primary wants are the essential desires that are crucial for survival and
basic well-being. These wants are fundamental for living and maintaining a healthy lifestyle -
Food, Water, Shelter, Clothing, Basic healthcare
Failure to satisfy primary wants can lead to serious consequences, such as illness,
malnutrition, or even death.
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Secondary Wants: Secondary wants are non-essential desires that enhance comfort,
enjoyment, and quality of life but are not necessary for survival. While they contribute to
overall well-being, these wants are optional and can be postponed or forgone - Luxury items
(e.g., designer clothes, high-end electronics, Entertainment (e.g., movies, vacations),
Hobbies and leisure activities
While satisfying secondary wants can improve quality of life and provide enjoyment, their
non-fulfillment does not threaten basic survival.
CONCEPTS OF ECONOMICS
1. Opportunity cost
2. Laws of supply and demand
3. Laws of increasing, diminishing & constant returns
4. Standard of living
5. Inflation
Opportunity Costs
Benefits or value that an individual, investor, or business misses out on when choosing one
alternative over another. It highlights the trade-offs involved in decision-making, especially in
the context of limited resources.
Opportunity costs are crucial for informed decision-making. By considering what is sacrificed
when making a choice, individuals and businesses can evaluate options more effectively and
allocate resources more efficiently.
Types of Opportunity Costs:
● Explicit Costs: Direct monetary costs associated with a decision (e.g., spending
money on one investment over another).
● Implicit Costs: Non-monetary benefits lost from the next best alternative (e.g., time
spent on one project that could have been spent earning income elsewhere)
Scarcity and Trade-offs: In a world of scarcity, every choice involves a trade-off.
Understanding opportunity costs helps clarify the implications of these trade-offs, ensuring
that resources are used where they yield the highest value.
Opportunity cost formula
Opportunity Cost = FO − CO
where:
○ FO (Foregone Option): The return on the best alternative that is not chosen.
○ CO (Chosen Option): The return on the option that is chosen.
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Considerations in Decision-Making
● When assessing opportunity costs, it’s essential to consider the risks associated with
each option. Higher potential returns often come with greater risks.
● Beyond just calculating opportunity cost, evaluate which option aligns best with your
financial goals and risk tolerance.
● Remember that opportunity costs aren’t solely financial; they can also include time,
effort, and other resources.
Inflation: Inflation is the rate at which the general level of prices for goods and services
rises, eroding purchasing power. It is a critical economic indicator that affects consumers,
businesses, and policymakers.
Inflation refers to the sustained increase in the price level of goods and services over a
period, typically measured annually.
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LAWS OF SUPPLY & DEMAND
The laws of supply and demand are fundamental principles in economics that
describe how the relationship between the availability of a product (supply)
and the desire for that product (demand) affects its price.
Explains the interaction between the sellers of a resource and the buyers for
that resource.
The law of demand states that, all else being equal, as the price of a good or
service decreases, the quantity demanded by consumers increases, and vice
versa - low supply and high demand increase price.
The law of supply states that, all else being equal, as the price of a good or
service increases, the quantity supplied by producers increases, and vice versa.
These two laws interact to determine the actual market prices and volume of goods that are traded in a market.
Several independent factors can affect the shape of market supply and demand, influencing both the prices and quantities that
we observe in markets.
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Supply
Quantity produced
Quantity produced
goes down
goes up
Supply
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LAWS OF INCREASING RETURNS
The law of increasing returns, also known as the law of diminishing costs,
describes a situation in production where increasing the quantity of a
variable factor (such as labor or raw materials) while keeping other
factors fixed results in a greater than proportional increase in output.
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LAWS OF DIMINISHING RETURNS
The law of diminishing returns, also known as the law of diminishing
marginal returns, explains how increasing one input in the production
process while keeping other inputs constant will eventually yield lower
per-unit returns.
The law states that when one input (such as labor or capital) is increased
in a production process, while keeping other inputs constant, there will
come a point where the additional output (marginal product) generated
from that input begins to decrease.
Marginal Product: This refers to the additional output produced when one
more unit of input is added. According to the law, as more units of a
variable input are added, the marginal product will eventually decline.
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LAWS OF DIMINISHING & INCREASING RETURNS
Both economic theories describe how increasing a variable or fixed factor can initially increase productivity, but
then start to decline.
The law of diminishing returns states that as a variable or fixed factor is increased, the marginal output will
eventually decrease.
Eg: Adding fertilizer to crops will initially increase output, but adding more than the third unit will decrease the
marginal return. Too much fertilizer can harm crops by making the soil unbalanced. A small restaurant hiring more
employees may create negative returns if there isn't enough space or the workflow becomes less efficient during busy
times.
The law of increasing returns, also known as economies of scale, states that as a variable or fixed factor is increased,
the marginal output will increase above the average.
Eg: Replacing an old HVAC system with a more energy efficient system is an example of returns to scale.
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LAWS OF CONSTANT RETURNS
● The return remains the same as the business is
expanded or contracted.
● Every additional investment of labour and capital
yields the same return as before. Or in other words,
whatever the scale of production, the cost of the
product per unit remains the same.
In certain cases, when the business moves towards the
optimum, the returns increase, and when it goes beyond the
optimum, the returns decrease. But if, after having reached
the optimum point, the industry is stabilized at that level of
output, the returns, continue.
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STANDARD OF LIVING
The standard of living refers to the level of
wealth, comfort, material goods, and
necessities available to a specific
socioeconomic class or geographic area. It
encompasses basic material factors such as
income, gross domestic product (GDP), life
expectancy, and economic opportunity.
The standard of living is closely linked to quality Economists typically measure the standard of
of life, which includes additional factors such as living using GDP, with per capita GDP offering
political and economic stability, freedom, a rough estimate of the goods and services
environmental quality, climate, and safety. available per person.
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Compiled by Prakruthi S Karadagi, Faculty, RVCA
MODULE 4: Possible questions
1. What is ‘want’? Explain all its characteristics. (20)
2. Differentiate between Primary wants and secondary wants (10)
3. Write short notes on: (i) Standard of living (ii) Law of increasing returns. (10)
4. Analyse and explain the housing market in Indian cities. (10)
5. Discuss the following: (20)
a. Laws of Supply and demand
b. Laws of increasing, diminishing and constant returns.
6. Discuss the following: (20)
a. Opportunity Cost
b. Standard of living
c. Consumption
d. Wants and needs
7. Discuss Consumption in Economics (5)
8. Explain Concept of utility (5)
9. Evaluate present housing market in Indian cities (10)
10. Compare free goods with economic goods (10)
11. Evaluate Laws of demand and supply with suitable examples (10)
12. Discuss Inflation (5)
13. Describe Consumption (5)
14. Write short notes on the following with examples (10)
a. Law of increasing returns and
b. Law of decreasing returns
15. Explain Standard of living (5)
16. Outline Opportunity cost (5)
17. Write short notes on (20) :
a. Inflation.
b. Human wants.
c. Opportunity cost.
d. Standard of living.
18. Explain the laws relating to increasing, Diminishing and Constant returns. (10)
19. Deliberate in detail, the laws of supply & demand (10)
20. What are the characteristics of ‘Wants’? (8)
21. Explain the following : (12)
a. Law of increasing returns
b. Law of decreasing returns
22. Discuss briefly present housing market in Indian cities (10)
BIBLIOGRAPHY
1. Mankiw, N. Gregory. Principles of Economics. 8th ed., Cengage Learning, 2018.
2. Krugman, Paul, and Robin Wells. Microeconomics. 5th ed., Worth Publishers,
2018.
3. Varian, Hal R. Intermediate Microeconomics: A Modern Approach. 9th ed., W.W.
Norton & Company, 2014.
4. Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States,
1867-1960. Princeton University Press, 1963.
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5. Pindyck, Robert S., and Daniel L. Rubinfeld. Microeconomics. 8th ed., Pearson,
2017.
6. Tucker, Irvin B. Microeconomics for Today. 8th ed., Cengage Learning, 2015.
7. Samuelson, Paul A., and William D. Nordhaus. Economics. 19th ed., McGraw-Hill
Education, 2010.
8. Blanchard, Olivier, and David Johnson. Macroeconomics. 7th ed., Pearson, 2016.
9. Gordon, Robert J. "The History of the Phillips Curve: Consensus and Bifurcation."
The Journal of Economic Perspectives, vol. 18, no. 2, 2004, pp. 25-50.
10. Sraffa, P. Production of Commodities by Means of Commodities. Cambridge
University Press, 1960.
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