A sound understanding on the common terms related to consumption is

Goods and Services

Goods and services are fundamental economic concepts that help satisfy human wants and needs. They can be categorized based on their characteristics and usage.

• a) Goods: Goods refer to tangible commodities that have physical existence and can be seen, touched, and felt. These are also known as material goods or visible goods. Goods help in satisfying human wants directly or indirectly. Example: Rice, books, clothes, furniture, vehicles, etc.
• b) Services: Services are intangible activities or benefits that satisfy human wants but cannot be seen or felt. They do not have physical existence, but they provide economic value. Services are also known as invisible goods or immaterial goods because they cannot be stored or transferred in the same way as physical goods. Example: Teaching services provided by a teacher, medical services offered by a doctor, legal advice from a lawyer, and repair services by a mechanic.

Free Goods and Economic Goods

Goods can be further classified based on their availability and pricing.

• a) Free Goods: Free goods are naturally available in abundance and do not have any price because they are not scarce. They are freely available to everyone and do not require production efforts. Example: Air, sunlight, river water, and rainwater.
• b) Economic Goods: Economic goods are scarce in supply and have a price attached to them. Since they require resources for production and distribution, they are not freely available. Economic goods are produced by human effort and are exchanged in the market. Example: Rice, wheat, oil, gold, and electronics.

Consumer Goods and Producer Goods: Goods can also be classified based on their usage by consumers or producers.

• a) Consumer Goods: Consumer goods are the goods that are directly used by consumers to satisfy their wants. They do not require any further processing before consumption. Consumer goods are also known as final goods because they reach the final consumer. Example: Rice, fruits, milk, clothes, and smartphones.
• b) Producer Goods (Capital Goods): Producer goods are not used directly for consumption but are used for producing other goods and services. These goods help in the production process and are also called capital goods or investment goods because they contribute to economic development. Example: Tractors, threshers, plows, and raw materials used in manufacturing.

Perishable Goods and Durable Goods

Goods can be categorized based on their lifespan and durability.

• a) Perishable Goods: Perishable goods are those goods that have a short lifespan and decay or perish quickly. They require immediate consumption or special storage conditions to prevent spoilage. Example: Fruits, vegetables, milk, fish, and meat.
• b) Durable Goods: Durable goods have a long lifespan and can be used multiple times over an extended period. They do not perish easily and provide long-term benefits to the user. Example: Automobiles, refrigerators, washing machines, and tractors.

Wealth and Income: In economics, the concepts of wealth and income are essential for understanding financial stability and economic status.

• a) Wealth: Wealth refers to the stock of economic goods possessed by an individual, organization, or nation at a particular point in time. It includes tangible assets such as land, buildings, machinery, and money. Wealth can be transferred from one person to another. Example: A person owning land, houses, and gold is considered wealthy. However, services are not included in wealth because they are non-transferable and cannot be accumulated in the same way as material goods.
• b) Income: Income refers to the earnings or revenue generated over a specific period through work, investment, or business activities. It is the flow of wealth received as wages, rent, profit, or interest. Example: A person leasing out a house and earning rent every month generates income. Similarly, a laborer earns wages for providing labor in the production process.

Real Income and Money Income: Income can be expressed in terms of either commodity or money.

• a) Real Income: Real income refers to income measured in terms of the quantity of goods and services a person can obtain. It represents the actual purchasing power of a person. The standard of living of an individual depends on real income rather than money income. Example: If a laborer receives 10 bags of paddy per year, then this is his real income because it is measured in terms of commodities.
• b) Money Income: Money income refers to income expressed in terms of money received over a period. It does not necessarily indicate the purchasing power of a person because the value of money can fluctuate due to inflation. Example: If a manager earns 20,000 per month, then this is his money income.

Desire

Definition: Desire is the mere wish to have something, regardless of whether a person has the means to acquire it.

Example: A person may desire to own a luxury car like a Ferrari, even if they don’t have the financial capacity to buy it.

Key Characteristics:
✔️ Unlimited in nature.
✔️ Not backed by purchasing power.
✔️ It does not influence the market unless it becomes a want.

Want

Definition: A want is a desire backed by willingness and ability to pay for a good or service. It is something that satisfies human needs.

Example: A student may want a laptop for studying because it is useful, and they can afford it.

Key Characteristics:
✔️ Wants arise from human desires.
✔️ They are unlimited and keep changing.
✔️ Satisfied by goods and services.

Difference Between Desire and Want

Demand

Definition: Demand refers to the quantity of a good or service that consumers are willing and able to buy at a given price over a specific period.

Law of Demand “Other things being equal, when the price of a good falls, its demand increases, and when price rises, its demand decreases.”

Example:

• If the price of apples decreases from ₹100/kg to ₹80/kg, more people will buy apples, increasing the demand.
• If the price increases to ₹120/kg, fewer people will buy apples, reducing the demand.

Factors Affecting Demand:
✔️ Price of the good.
✔️ Income of consumers.
✔️ Prices of substitute and complementary goods.
✔️ Consumer preferences.

Utility

Definition: Utility refers to the satisfaction or pleasure a consumer derives from consuming a good or service.

Types of Utility

1. Total Utility (TU): The total satisfaction from consuming all units of a good.
2. Marginal Utility (MU): The additional satisfaction from consuming one more unit of a good.

Law of Diminishing Marginal Utility (DMU) As a person consumes more units of a good, the additional satisfaction derived decreases.

Example:

• Eating one slice of pizza gives great satisfaction.
• The second slice gives slightly less satisfaction.
• The third slice may give even lesser satisfaction.
• After a certain point, additional consumption brings no satisfaction (or even dissatisfaction).

Cost

Definition: Cost refers to the expenditure incurred in producing goods and services. It represents the value of inputs used in production.

Types of Costs

1. Fixed Cost: Costs that do not change with production levels (e.g., rent of a factory).
2. Variable Cost: Costs that vary with production (e.g., raw material costs).
3. Total Cost (TC) = Fixed Cost + Variable Cost
4. Opportunity Cost: The cost of the next best alternative foregone.

Example: A farmer can grow wheat or rice. If he chooses wheat, the cost of not growing rice is the opportunity cost.

Price

Definition: Price is the amount of money required to purchase a good or service. It is determined by market forces of demand and supply.

Factors Affecting Price

✔️ Cost of production.
✔️ Demand and supply conditions.
✔️ Government regulations (taxes, subsidies).
✔️ Market competition.

Example:

• When the supply of onions decreases, their price increases.
• If a new smartphone is launched with high demand, its price remains high.

Wealth

Definition: Wealth includes all assets (physical and financial) owned by an individual, business, or country that has value and can generate income.

Types of Wealth:
✔️ Personal Wealth – Houses, cars, gold, savings.
✔️ National Wealth – Infrastructure, industries, natural resources.

Example:

• A farmer’s land and livestock contribute to agricultural wealth.
• A country’s gold reserves and industries contribute to national wealth.

Capital

Definition: Capital refers to man-made resources used in the production of goods and services. It is a crucial factor of production.

Types of Capital

1. Fixed Capital: Machines, buildings, equipment (long-term use).
2. Working Capital: Raw materials, cash, goods in process (short-term).
3. Human Capital: Skills, education, and knowledge of workers.

Example:

• A tractor used in farming is fixed capital.
• Money invested in a business is financial capital.

Income

Definition: Income is the money earned by individuals, businesses, or nations from various sources.

Types of Income

✔️ Personal Income: Salary, wages, rent, interest, profit.
✔️ National Income: The total income earned by a country from production and services.

Example:

• A teacher earns a salary as income.
• A farmer earns profit from selling crops.

Welfare

Definition: Welfare refers to the overall well-being and standard of living of individuals and societies.

Types of Welfare

✔️ Economic Welfare: Income, employment, access to goods and services.
✔️ Social Welfare: Education, healthcare, sanitation, security.
✔️ Public Welfare: Government programs like food subsidies, pensions, scholarships.

Example:

• The government providing free healthcare improves public welfare.
• Higher wages improve economic welfare by increasing purchasing power.

Summary Table