Basic concepts: goods, utility, wants, demand, supply, economic laws, micro and macro
Principles of Economics · Unit I · Topic 2 of 17 · 6 min read
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Cases checked to exist. Read the judgment before quoting a holding.
Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.
1. Consumption and goods
Consumption is the use of goods and services to satisfy wants directly. It is the beginning and the end of all economic activity: people produce because they wish to consume.
A good is anything that satisfies a human want. The main classifications:
- Free and economic goods. Free goods (air, sunlight) are available in unlimited quantity and have no price. Economic goods are scarce and command a price.
- Consumer and producer goods. Consumer goods satisfy wants directly (bread, clothes). Producer or capital goods help produce other goods (machines, tools).
- Durable and non-durable goods. A refrigerator gives service over years; milk is used up at once.
- Private and public goods. A private good is used by its owner alone; a public good (street lighting, defence) is used by all and no one can be excluded.
- Material and non-material. Physical goods as against services.
2. Utility and want
Utility is the want-satisfying power of a commodity. It is subjective (it depends on the person), relative (it varies with time and place), and ethically neutral: a cigarette has utility for a smoker though it is harmful. Utility is not the same as usefulness or pleasure. The forms of utility (form, place, time, service, possession) and its measurement are treated in the note on utility.
A want is a desire for something. An economic want is a desire backed by the ability and willingness to pay. Characteristics of wants: wants are unlimited; each particular want is satiable; wants are competitive (limited money must be divided among them) and complementary (a car needs petrol); wants recur; they vary with age, income and custom; and they become habits. Wants are classed as necessaries, comforts and luxuries.
3. Demand and supply
Demand is the quantity of a commodity that consumers are willing and able to buy at a given price during a given period. Three elements are essential: desire, the ability to pay, and the willingness to spend. A beggar’s wish for a car is not demand. Demand is always stated with reference to a price and a time period.
Supply is the quantity of a commodity that sellers are willing to offer for sale at a given price during a given period. Supply is not the same as stock: a farmer may hold 100 quintals of rice but offer only 60 at the current price. Other things being equal, supply rises with price (the law of supply).
4. Production, firm and industry
Production is the creation of utility, that is, adding value to resources so they satisfy wants. Man cannot create matter; he changes its form, place or time. The four factors of production are land, labour, capital and organisation (enterprise); their features are treated in Unit III.
A firm is a single unit that hires factors and produces goods for sale (one textile mill). An industry is the group of all firms producing the same or a closely similar product (the textile industry). Under perfect competition the firm is a price-taker; the price is set by the industry’s demand and supply.
Factor incomes. The national product is distributed among the four factors:
| Factor | Reward |
|---|---|
| Land | Rent |
| Labour | Wage |
| Capital | Interest |
| Organisation | Profit |
Theories of each are in Unit V.
5. Assumptions in economics
Economic reasoning works by holding other things constant: ceteris paribus. The law of demand assumes that income, tastes and the prices of related goods do not change while price changes. Other common assumptions are that consumers are rational and seek maximum satisfaction, that firms seek maximum profit, and that there is perfect knowledge of the market. Assumptions simplify the world so that a single cause-and-effect link can be isolated, but they also limit how far a law holds in practice.
6. Economic laws
An economic law is a statement of a tendency of human behaviour in economic matters. Marshall called economic laws “statements of economic tendencies”: they state what will happen if certain conditions are fulfilled. Examples: the law of demand, the law of diminishing marginal utility, the law of variable proportions.
Features.
- Hypothetical: they hold only if the assumptions hold (“other things being equal”).
- Statements of tendency: they say what usually happens, not what must happen.
- Less exact than natural laws. The law of gravitation admits no exception; the law of demand has several (Giffen goods, articles of prestige).
- Universal in a limited sense: diminishing marginal utility applies everywhere, but most laws depend on the institutions of a particular society.
- Positive: they state what is, not what ought to be.
Why they are less exact. Economics deals with human beings, whose behaviour is not uniform and changes with tastes, fashion and expectations; economic data are complex and interrelated; controlled experiments are not possible; and the ceteris paribus condition is rarely met in reality. Marshall compared economic laws to the law of tides rather than to the law of gravitation: the tides follow a tendency that is disturbed by wind and weather.
Economic law and legal law. A legal law is a command of the State backed by a sanction; breaking it invites punishment. An economic law is a description of behaviour; no one is punished for buying more when a price rises. Legal laws can be changed by the legislature; economic laws can only be discovered.
7. Micro and macro economics
The terms were introduced by Ragnar Frisch in the 1930s.
Micro economics studies individual units: a consumer, a firm, an industry, the price of a particular good. It is also called price theory. Its subject-matter is product pricing, factor pricing (rent, wages, interest, profit) and economic welfare. Its limitation is that what is true of an individual may not be true of the whole economy (the fallacy of composition: one person saving more is prudent; everyone saving more can reduce national income).
Macro economics studies the economy as a whole and its aggregates: national income, total employment, total consumption, saving and investment, the general price level and economic growth. It is also called income and employment theory, and developed mainly after Keynes’ General Theory of Employment, Interest and Money (1936). Importance: it explains the working of the whole economy; it guides government policy on unemployment, inflation and growth; it is needed to understand national income and international comparisons; and it explains trade cycles. Limitations: aggregates can hide differences within them (a stable general price level may conceal rising food prices), and individual units cannot always be ignored.
| Basis | Micro | Macro |
|---|---|---|
| Unit of study | Individual consumer, firm | Whole economy |
| Central question | Price of a good or factor | Income, employment, price level |
| Other name | Price theory | Income theory |
| Method | Partial equilibrium | General aggregates |
The two are complementary: macro totals are built from micro decisions, and micro decisions are shaped by the macro environment.
How this is examined
“Economic laws” was a short note in the June 2025 papers (Q.8 of the 100-mark and Q.1(b) of the 80-mark paper), and “Macro economics” a 10-mark note in June 2025 (Q.9). For economic laws, give Marshall’s definition, the features, the reasons they are inexact and the contrast with legal laws: the last point suits a law student and is easy marks. For macro economics, define it, list its scope and importance, and add the micro–macro comparison table.
Now try the real questions: Principles of Economics past question papers.