Basic Concepts
of
Economics
contd..
It refers to the stock of all assets
which are a source of income. It is a
stock concept.
Wealth-
▪ Possesses utility,
▪ Is scarce or limited in supply,
▪ Ownership can be transferred from
one person to another.
Personal Wealth Social Wealth
❖ It refers to stock of ❖ It is the stock of all
all those assets that tangible wealth of a
are owned by a nation that
person. contributes to the
production of gods
and services.
❖ It is also called
❖ It is also called
individual wealth national wealth.
Personal Wealth Social Wealth
❖ Examples: ❖ Examples:
- Money in hand or in - Reproducible assets like
banks factories, machineries,
- Financial assets like equipments, stocks of
bonds, shares of durable goods, etc.
companies. - Non-reproducible assets
- Real assets like houses, like mineral wealth,
farms, family forest wealth, etc that
businesses, etc. come under natural
resources.
It is a sense of satisfaction,
happiness or a sense of well-being
among the people.
➢ A person’s well-being is dependant on a large
number of variables.
➢ Some of these variables are economic variables
like income of the person, possession of some
economic goods.
➢ These economic variables can be easily measured
in terms of money.
➢ Thus, welfare affected by factors which can be
expressed in monetary terms or welfare that can
be directly or indirectly measured in money terms
is called Economic Welfare.
➢ Non-economic welfare is one that is
influenced by factors that cannot be expressed
in monetary terms. It relates to social, political,
moral or other non-economic factors like law
and order, environment, degree of freedom etc.
It is defined as the sum total of the happiness
of all individuals in the society, i.e. it
indicates the sum total of both economic and
non economic welfare.
➢ The concepts of wealth and welfare are closely
related. There is usually a direct relationship
between them.
➢ Economists presume that more the amount of
wealth, the more is the level of welfare.
However, it may be noted that if the wealth of a
society increases leading to inequality in the
distribution of income, welfare may not respond
positively.
❖ The process of economic growth is accompanied by
cyclical fluctuations in economic variables like national
income, employment, investment, price level etc.
❖Periodic fluctuations in these economic variables are
called business cycles.
❖The business cycle is characterized by alternating
periods of expansion and contraction of economic
activities.
y
Output
IV
III
I
II
x
0
Time period
Phase I – Recession Phase II – Depression
Phase III – Recovery Phase IV – Boom(Peak)
WHAT ARE THE FOUR PHASES OF
A BUSINESS CYCLE ?
❖ Recession – The economic variables like income,
employment, investment etc show a falling trend over a
sustained period.
❖ Depression – It is a case of severe recession. During
depression, the economic variables remain at a very low
level. Excess supply conditions prevail and there is a large
reduction in employment, output and income.
❖ Recovery - It marks the revival of economic activities. The
economic variables show a rising trend over a sustained
period.
❖Boom - During boom, the economic variables attain a peak
level signifying prosperity. There is a large expansion in the
level of employment, output and income.
❖ It is the total amount of goods which all the
buyers of final output desire to purchase in the
economy.
❖ In other words, it refers to the ‘desired’
aggregate expenditure to be made by the people
for the purchase of different goods and services
produced in an economy during any particular
accounting year.
Note: The word ‘desired’ indicates the ‘planned’
expenditure that people wishes to make for the
purchase of goods and services in a year. It is crucial
for the determination of aggregate demand, though it
may not exactly match with the actual expenditure.
❖ It is the total amount of output which all the firms
or producers are willing to produce in the economy.
❖ In other words, it refers to the ‘desired’ aggregate
flow of goods and services in an economy during any
particular accounting year.
❖ STOCK variables are those variables that are
expressed at a point of time.
Eg. Stock of wealth, capital, bank deposits etc
❖FLOW variables are those variables that are
expressed over a period of time. It has a time
dimension.
Eg. National income, investment, demand, supply etc
❖ There are three basic entities in an economy :
➢ Households
➢ Firms
➢ Government