Elementary Issues and Concepts of Economics
Elementary issues and concepts of economics

Elementary Issues and Concepts of Economics

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Just like all the subjects have their unique concepts and issues, economics also has certain unique matters and issues. Many of the concepts and fundamental issues of economics are used in our day-to-day life. The major elementary issues and concepts of economics which have created the subject matter of economics can be discussed as below;

Contents

Consumption

Every human being needs to satisfy his or her wants and demands. Commodities are needed to satisfy human wants and demands. Commodities can be classified as goods and services.

Goods are tangible things such as shirts, cars, biscuits, etc. and non-tangible things like music, teaching or education, acting or performance of artists, health facilities, etc. are known as services.

These commodities (or services and goods) are to be used or disbursed for the satisfaction of fulfillment of human desires. This task or act of consuming goods and services or commodities to please human wishes or desires is called consumption.

According to Meyers, ‘Consumption id the direct use of goods and services in satisfying human wants.’

Anybody who uses commodites to please his or her desires is called a consumer.  Consumption is the process by which human wants are satisfied or fulfilled.

For example, if we consume banana to satisfy or eliminate our hunger then it is called consumption.

Consumption could take place instantly in one act of their use at any point in time. Consuming apple to satisfy hunger immediately satisfies the need and this apple cannot use again.

But in some other cases, the consumption may take place gradually over some time means the same goods can be used again and again to satisfy human wants.

For instance, in the case of durable consumer goods like clothes, furniture, televisions, cars, etc. consumption takes place for a long period till the goods are completely used up.

If we watch TV every time we want relating to the entertainment program and we watch TV until our want is fulfilled. Thus, the use of TV satisfied ours wants for a long period till the TV becomes unusable.

Sustainable Consumption

Sustainable consumption can be seen in the light of issues related to sustainable development. Sustainable consumption is the consumption of goods and services which meets the need of people and improves the quality of life without having any adverse impact over the environment and needs of future generations.

The current consumption of the most of the countries is destroying the environment, depleting the stock of natural resources, partially distributing resources between people and countries, contributing to social problems such as poverty, and adversely affecting sustainable development.

Therefore, the consumption pattern must be such that it assists in sustainable development and at the same time it does not adversely affect the needs of future generations.

To achieve such objectives such goods and services must be used which reduces the extensive use of natural resources and decrease environmental damages, pollution, and emission of wastages so that the interest of the future generations is not risked.  

Why consumption: Significance of consumption

Consumption is necessary due to its following contributions or roles;

It is the prime basis for economic activities

Consumption itself is one of the significant economic activities. All the other economic activities like production, exchange, and distribution arise due to the consumption requirement in an economy.

Consumption is the final motive for all economic activities

Economic activities start with an act of production of goods and services and end with the use of these produced/outputs for consumption purposes.

Consumption is the index of the standard of living

The level of consumption and the types of consumption of goods and services govern the living standard of the people.

It is the basis of economic welfare

Economic welfare denotes total satisfaction or happiness gained from the use or exploitation of economic goods. It is believed that the larger the use of goods and services, the larger will be the economic welfare of the individuals and states.

Consumption directly affects the level of employment

The level of employment in an economy rests on the level aggregate demand of that particular economy. But the level of such aggregate demand centers largely on the total consumption of the nation.

So consumption is one of the most significant elementary issues and concepts of economics

Utility

The task of consumption of goods and services keeps the power to satisfy human wants because these goods and services possess utility.

Thus, only those goods or services are paid or purchased which have the power or ability to satisfy human wants. Understanding the concept of utility is thus important.

The utility can be defined as the want satisfying power of a commodity. The ability or strength or capacity of a particular commodity to please human wants is called utility of that particular commodity.

According to Prof. Hibdon, ‘utility is the ability of a good to satisfy a want.’

In the measurement of objective context, we can say that utility is the amount of satisfaction derived from goods or services at a particular time.

Characteristics of Utility

The utility is a subjective matter

It means it cannot be observed, measured, and identified.  It depends on the individual’s subjective estimate of the amount of satisfaction he or she is likely to get from a good or service.

The utility is not measurable

It cannot be measured or calculated in the objective terms. But it can be measured by measuring rod. However, cardinal thinkers or economists believe that it can be measured.

Marshal defined the concept of marginal utility of money to determine the utility one has got from a particular unit of consumption.

The utility is relative

Since it is a subjective phenomenon so it is not absolute but relative. Utilitydiffers from one individual to another, from one particular place and time to another place and another point of time.

The utility is different than usefulness

There is a fundamental difference between utility and usefulness. A commodity may possess utility even it is not useful.

For example, consumption of cigarettes is harmful to human health but it has utility and people get satisfaction from its consumption so that they pay price for it. So, the term utility has nothing to do with the usefulness of goods.

No moral or legal meanings

The utility has no legal or ethical meanings. It is always neutral between good and bad, between useful and harmful. A commodity may be considered immoral in the legal and ethical background but still, it may possess utility.

Thus, the utility is free from legal implications. Possession of a gun by a dacoit may be illegal but it has utility for him or her.

The utility is abstract

It is always an abstract term as it is not a visible and tangible phenomenon.

Therefore, among different elementary issues and concepts of economics, the utility is also one of the significant ones.

Production

Production is one of the vital economic activities in all economies. The task or effort of creating or generating goods and services is referred to as production.

Goods that please human needs are watched as packages of utility. Hence, production would mean the creation of utility or producing those things which can satisfy human wants.

In a simple sense, production involves the conversion of raw materials into tangible goods. For example, converting wool into a woolen sweeter is called production.

According to Adam Smith, production means the creation of material or tangible goods.

He excluded intangible goods or services from the concept of production.

At present, the term production is seen comprehensively.

According to A.H. Smith, ‘Production is the process that creates utility in goods.’

Any activity that makes an object useful is called production. Production in its detailed meaning thus not include only material things but also intangible things or services like service of lawyers, doctors, teachers, artists, etc. 

Trading and transport services are regarded as part of the production as it is not completed until the produced output reaches the area of consumption from the areas of production.   

Therefore, production is nothing but it is an addition of the utility. The utility can be added to any object or output in the following ways;

Forms of the Addition of Utility

Form utility

if the utility is added or increased by changing the form of object or service then it is called dorm utility and such addition in utility is known as production.

For example, if a carpenter changes the form of a piece of wood to the furniture and such transformation adds the utility.

Place utility

If the utility in object or services is added or increased by changing the place then it is called place utility.

For example, if the goods are transferred from the place of manufacture to place of the consumer then it will create utility, and production is said to be held.

Time utility

If the utility is added or created by changing the time of consumption then it is called time utility. For example, the use of ice cream in summer created more utility.

Service utility

Service utility is subject to the creation of utility by providing personal services by teachers, doctors, lawyers, bankers, etc.

In conclusion, we can say that production is the procedure of adding utility to the object through different types of addition or creation of utility. The producer does produce or adds utility.

Factors of Production/Resources

The products or goods and services are produced with the help of factors of production. Different productive resources that contribute to the production process are known as factors of production.

In other words, we can define factors of production as those resources which are used to produce goods and services. Thus, they are called factors of production because they are used in the process of production.

They are also called inputs or factor inputs. Economists separated factor inputs into different four groups as land, labor, capital, and entrepreneurship.

Features of Factors of Production

Coordinate function

Production is the result of cooperation among all the factors of production. It means for the production of any commodity; it is necessary to combine all the factor inputs.

No fixed input ratio

There is no fixed ration of factor inputs coordination in the production process. It means there is a need for all the factor inputs while producing any of the commodities.

But there is no fixed ratio of using such resources in the production process. Traditional types of industries may require more labor than the capital but modern industries may require more capital and equipment rather than labor.

Sale of services only

Factors of production only sell their services not themselves to the producer or an entrepreneur.

Existence

All the inputs have a physical existence. They are tangible resources.

Nature of it’s demand

The demand for the factors of production is always a derived demand.

State of mobility

All the factors of production don’t have the same mobility.

Thus it is also one of the prominent elementary issues and concepts of economics.

Price

If the economy includes a free market economy then every goods and service have a price tag with them.

Here the price or the price tag of every goods or service refers to the amount or unit of money that to be given to get these commodities. So, it is the exchange value between buyers and sellers in the market.

The price of a particular good or service expressed in terms of monetary or economic units is called an absolute price or market price or money price of that particular commodity.

Prices are an essential element of the free market economy. Commodities having utility have several prices in such type of economy.

So, there is the price of the products because they have a utility or they can please human wants on the one hand, and similarly, they are scarce in availability so one has to pay to get the desired unit of the commodity.

Consumers will not be ready to pay price for a product unless that product is useful to them. If goods are available in an unlimited amount then they cannot order or transacted at a price.

For instance, fresh air is essential for human being but no one pays for it because it is not scarce or it is available in an unlimited amount. Such types of goods are called free goods and free goods do not have a price.

In its opposition economic goods have prices. Economic goods are those which are produced by the efforts of factors of production. So, scarcity is a fundamental issue in the case of a civilized economy.

In the free market economy, such prices are determined by the interaction of demand and supply in the market. They buyers create demand for goods and sellers or producers do supply of these goods to meet the demand of the buyers.

There is competition among the buyer to buy and between sellers to sell goods. Thus, the interaction between these two opposite competitive forces of demand and supply determined the price in the market and that price is called the equilibrium price.

Higher demand leads to an increase in price and an increased price of goods motivates producers to produce more and supply more into the market.

With more supply into the market price will again fall and demand and supply again become equal. This is the process of the market mechanism in the free market economy. So the market mechanism is among important elementary issues and concepts of economics.

General Price Level

General price level deals with the average price level of the prices of all the commodities produced in the economy. It is said the price level in short.

The general price level may increase or decrease during a particular period. The sharp increase in the general price level is called inflation and a sharp reduction in the general price is called deflation.

Inflation

Inflation can be defined as the process of continuous and persistent increase in the general price level in the given period. It is also one of the important elementary issues and concepts of economics.
It is not the condition of having a high price of a particular product or higher price in a particular market but it is the process of increase in price in all the sectors of the economy.

Only a reasonable or measurable rise in price level is called inflation. A modest rise in price level like 1 to 2 percent per annum is not called inflation. It is the case in which there is an unhealthy increase in general price over time.

The rise in price must be prolonged to called it inflation. One time increase or temporary increase in prices is not regarded as inflation.

It is measured or denoted as the rate of increase in price represented by the price index like consumer price index (CPI) and wholesale price index (WPI).

Demand-Pull Inflation

The inflation resulting from the increased aggregate demand forces is known as demand-pull inflation. It occurs in the case where the demand for goods and services becomes higher than the supply of goods and services at an existing price.

This excess demand leads to a rise in price and such rise is called demand-pull inflation.

Cost-Push Inflation

It is the inflation resulting from the changes in supply-side factors. When there is an increase in prices due to an increase in the cost of production then it is called cost-push inflation.

The increase in cost may have resulted from the increased wage rate or increased profit margin.

Value

The term value refers to the importance or use of something. In economics, the value of a commodity denotes the valuation sited by a household on the use or consumption of this particular commodity.  The value may have two meanings as;

Value in use

Value in use refers to the utility derived by using or consuming a particular commodity. For example, water has much value in use. It is also known as the consumption value.

Value in exchange

It is the case in which value is observed or determined by exchanging particular goods for the price of other goods.

In barter system value is exchanged is related to the creation of value by exchanging goods with goods but in the monetized system it is related to exchanging a commodity with a monetary unit.

We can see different goods that have a higher value in consumption or use rather than value in exchange and vice versa.

For water, it creates higher value in its use rather than value in exchange. But in the case of luxurious goods like a diamond has a high value in exchange and low consumption value.

Market

Demand and supply are two fundamental concepts in economics. As we know that in the free market economic system forces of demand and supply operate such market framework.

Thus, markets take an integral part in a free-enterprise economic system. A market assists in buying and selling of products produced in the country.

In the general sense, the word market denotes a physical place where commodities are bought and sold such as Kathmandu, Pokhara, Kanchnpur, Patan, etc.

So, the concept market in this ordinary sense gives an idea of a single place to which people go to buy something. However, advancement in the means of transportation and communication and financial institutions has helped in extending the concept of the market beyond its traditional idea of a single physical location or place.

Thus, for the commodity like gold, there may be a world market as such a commodity can be purchased anywhere in the world as a uniform price.

In economics, the market is not considered as a particular location or place. Here the essential feature of the market, irrespective of its size and extent, is that buyers and sellers should be able to strike a bargain.

Thus, in economics, a market means a system or a set-up in which the buyers and sellers of the commodity can work together and communicate with each other and hit a deal concerning the price and the quantity to be bought and sold.

According to J.L. Edwar, ‘A market is the mechanism by which buyers and sellers are bought together. It is not necessarily a fixed place.’

In an economic sense to be called market it has two fundamental aspects different than the classical thought of the market.

First is that the market needs not to be located in a particular location. The geographical areas of a market may be large or small depending on how scattered the buyers and sellers are.

It may be a small local market or as large as the world market like world marker for cars, mobiles, computers, etc.

The second is that to be a market buyer and seller does not need to have any personal contact with each other.

The thing that they need is a system of communication with each other to finalize a transaction. Thus transactions can be made through telephone, correspondents or the internet, etc.

Types of Markets

The market in economics basically can be categorized into two types as goods market and factor market.

Goods market

It is that market where goods and services are bought and sold. Firms are the seller in this market and households, other firms and government are buyers. Cloth market, car market, etc. are the example of the goods market.

Factor market

This market is the place where factor services are bought and sold. The labor market, capital market, etc are the factor markets.

Entrepreneurs in these markets are buyers and the sellers are the owners of factors of the production. For instance, labor himself is the seller, and entrepreneurs looking for labors are buyers.

The household sector sold resources in this market and receives the factor payment from the business or government sector (entrepreneurs). Therefore the market places a significant count on the important elementary issues and concepts of economics.

Money

In modern economies, money is used to buy commodities and factor services. Based on the concept of labor specialization people produce a certain commodity in a larger quantity than they could consume themselves and sell these excess quantities to buy or obtain other goods and services they require in their life.

Thus specialization has been supported by the exchange. Here exchange is the process of trading excess or surplus goods that people have to get the other things which they need.

Before money was invented goods were exchanged for goods and this is called barter economic system. This system prevails even today in some of the traditional and tribal communities.

The barter system of exchange was a highly inefficient and clumsy system of exchange involving wastage of human efforts and restricted the scope of specialization and division of labor.

Barter system was the real obstacle to the expansion of the economy. Due to such difficulties and limitations of the barter economic system money was invented in the history of humankind.

So all the modern economies are money using economies and almost all the transactions in such economies are carried out with the use of money.

According to Crowther money is everything that is generally accepted as a means of exchange and, at the same time, acts as a measure and store of value.

Thus the essential characteristic of money is that it is generally accepted as a means of payment for all the transactions. This general acceptability works as a means of payment for goods and services. Money now a day’s includes currency money and deposit money.

Currency money consists of paper money and coins. Currency notes or paper money is issued by the central bank of the nation. Coins refer to metallic money or metallic coins.

Deposit money or bank money refers to the deposit held with the BFIs based on which cheques can be drawn. 

Thus money is one of the most usable and fundamental inventions of humankind and the economies using money as a system of exchange for carrying out various types of economic transactions are called money economies.

Income

Income is one of the important elementary concepts of economics. It can be defined as the flow of money accruing to an individual or all the people in an economy or the flow of goods and services to an individual or entire people of the economy over a particular period.

In modern money economies, it is generally expressed in the monetary terms such as any particular individual is earning an income of Rs. 50,000 per month.

Some people earn income by selling products that are produced by them. For instance, a farmer may produce surplus rice with the help of his family members and can earn money income by selling such a surplus quantity of rice into the product market.

In modern economies, there is specialization and division of labors and as a result, people sell their factor services to business firms and receive money income in the form of various factor payments like wages, rents, interest, profit, etc.

Thus, business firms produce various goods and services by hiring the factor services provided by households and households earn factor returns in their productive contributions and this is called factor return or factor income.

All the output produced by the business firms in the economy is if seen in the total form then it becomes the national output. The amount of money or payment paid to the owners of the factors of payment is if added then it becomes national income.

Thus, national income can be defined as the value of all final goods and services produced by the residence of the country in a particular period or a year.

Following points should be considered while looking at the concept of national income;

  • It is a monetary measurement of all verities of products in the economy
  • It only includes the value of all the newly produced final products. It means it excludes the accounts of intermediate goods or services which are further processed before they are used or sold to consumers,
  • National income is a flow concept and it is the measure of the flow of final goods and services generally during a year.

So it is also one of the important elementary issues and concepts of economics and has helped a lot to expand the scope of economics.

Per Capita Income

It is the average income of the residents of a particular country in a particular period. It is the income per head of population and obtained national income for a particular time is divided by the population of the same period.

Thus PCI=  NI for particular time period/Population

Per capita income is one of the most used economic indicators to measure the living standard of a particular place or country.

Traditionally PCI was taken as an index or measure of economic welfare and economic development. An increase in PCI denotes an improvement in the living standard of the people as well as the development in the economy.

But in modern times only an increase in the value of PCI does not ensure improvement in the living standard of the people and economic development of the nations. 

Saving

Income to the HHS arrived in the form of wages or salaries, rent, interest, and profits.  HHS uses this income in buying consumer goods. However, an entire income may not need to be spent on the purchase of consumer goods.

A fraction of the proceeds could be saved. Saving thus refers to such part of the income which is not spent on consumption. Thus saving is the income that households receive but do not spend on purchasing goods and services.

HHS would like to save a part of the income they earn for various reasons like meeting the expenditure on higher education of their children, construction of residential houses, etc.

The saving made by HHS is called private saving.

The saving may be made by businesses and governments as well. The business sector may generate saving by keeping their earning as retained earnings. It means saving by the business is achieved by not distributing the part of the profit to their shareholders.

Government saving is the saving done by the government (federal, state, and local governments). It is obtained through budget surplus. The budget surplus is the condition of having excess government revenue than its expenditures.

Saving generated by an individual earner is called individual saving. Saving made by families and business firms jointly known as private saving.

The saving made by all the individuals in the economy is called aggregate or total saving of an economy. It is noted that saving is different than savings. Savings is the plural form of saving.

It is the whole quantity of saving accumulated for a time. It is the accumulated value of past savings. And saving is also one of the important elementary issues and concepts of economics.

Investment

Investment is the next important elementary issues and concepts of economics. Investment can be defined as the act of using productive resources for the production of capital goods i.e., goods that are used for producing other goods and services in the future.

Investment is the act of adding capital stock or capital assets such as machinery, tools, and real capital assets. So the investment is also known as capital formation. These goods are produced largely by the business firms and they may be bought by firms, individuals, or government.

Components of Investment

The major components of investment goods are pointed as below;

Producer’s fixed investment

The producer’s fixed investment consists of new capital goods such as plants, types of equipment, tools, and machinery. Capital goods are often called a producer’s fixed investment.

Investment in residential housing and non-residential structure

It includes investment made in the construction of residential houses and non-residential structures like office buildings, power plants, bridges, roads, etc. Residential housing gives utility slowly over a long period.

For this reason, housing construction is considered as an investment rather than as consumption. Investment in residential housing is different from other forms of investment in the sense that these houses are sold to households while other capital goods are sold to firms.

Investment in stocks

All the producing units keep stock of raw materials, semi-finished goods, and finished goods in storehouses or factories for smooth production activities.

The net addition to stock is regarded as an investment because it represents goods produced but not used for current consumption.

The summation of all these three components of investment is called gross investment. If the amount of depreciation is deducted from the gross investment then we will get net investment.

The increment in the net investment represents the real capital addition in the economy.

Thus, in economics investment is an addition in productive capital resources and investment in financial securities like share, bonds, stocks, debentures, etc is not a real investment and is called financial investment.

The financial investment does not add any productive physical capital stock. Financial investment is only a transfer of financial resources.

Wealth

Wealth denotes the stock of all those assets which are sources of income. Wealth is a stock concept and therefore it is expressed at a point of time such as 2nd June 2020. It occupies a significant space in the list of elementary issues and concepts of economics.

Anything to be regarded as wealth must possess the following features;

  • Utility: it must give some satisfaction,
  • Scarcity: limited in quantity supply,
  • Transferability: ownership can be transferred from one person to another person,
  • Exchange value: it must have an exchange value.

Wealth could be individual as well as national. Individual or personal wealth refers to the stock of all those assets which are owned by a person.

For an individual’s wealth, we can say that at any moment in time individuals in an economy have a given stock of wealth. The wealth of individuals can be seen in the following forms;

  • Some wealth is held as money in hand or banks like paper money, coins and chequable deposits with BFIs,
  • Wealth is partly kept in the form of financial assets along with money such as bonds, shares of companies, etc.,
  • A real asset in the form of houses, farms, and family businesses.

On the other hand, the wealth of the entire nation is called national or public or social wealth. National wealth is the stock of all tangible or real wealth that contributes to the production of goods and services. Here real assets include two types of assets;

Reproducible assets

These are man-made and can be reproduced. This type of assets includes the following;

  • Fixed assets like machinery and equipment of all kind and buildings and other structures,
  • The stock of durable goods like inventories

Non-reproducible assets

Non-reproducible assets include assets and natural resources like land, mineral wealth, and forests, etc. which are created by nature. They are regarded as a gift of nature.

Thus national wealth includes both reproducible assets and non-reproducible assets. In modern times national wealth includes human capital and technological capital along with reproducible and non-reproducible assets.

Financial assets held by domestic residence are not part of national wealth because the value of domestic financial assets is offset by the domestic liability of the same amounts.

For instance, money deposited by an individual is an asset for the depositors but a liability for the bank. Thus this deposit in the bank does not represent wealth for the economy as a whole. But net foreign financial assets are part of national wealth.

Welfare

Welfare is considered as satisfaction and pleasure as the measurement of well being of the people. Different factors affect the satisfaction or well being of the people.

Consumption of goods and services, more leisure, good environment, family relations, degree of freedom, law and order situation, etc. determine the level of well being of the people.

Some factors like more consumption, more leisure, good weather, more freedom, more security, etc. increase the well-being of the people. And some factors like more work, natural disasters, pandemic, etc. reduce welfare.

Some factors which can be expressed in monetary terms like national income, consumption, investment, etc. ensure welfare to the individuals.

And some factors like good environment in the nation or societies, social relation in the society, understanding among family members, degree of freedom, etc. cannot be measured in monetary terms also increase the welfare of the people. 

Economic Welfare

Welfare that can be measured in terms of monetary units is called economic welfare. This type of welfare is based on the factors that are determined in money values. It includes investment, PCI, national income, consumption, etc.

Non-economic Welfare

The welfare-based on non-economic factors on those factors which we cannot measure in the monetary terms is called non-economic welfare. The welfare derived by a good legal system, good environment, etc. constitutes to the non-economic welfare.

The summation of economic as well as non-economic welfare of the country is called the total welfare of people. Thus, social or total welfare includes the total of the happiness and satisfaction of all the individuals in society. This happiness is derived from the consumption of economic and non-economic factors.

Thus it is also one of the important elementary issues and concepts of economics.

Business Cycle

The regular changeability and instability or ups and downs in the collective monetary activities of an economy over time is called the business cycle or trade cycle. It is short-term fluctuations in output, income, and employment in the economy.

It can be featured by the changing trend of expansion and contraction in aggregate economic activities. A business cycle consists of expansion occurred in many economic activities, income, output, and employment and that is followed by a contraction in similar economic activities.

Thus there are wave-like movements seen in the trade cycle. A typical business cycle has the following four phases;

Expansion or prosperity: expansion in aggregate economic undertakings,

Recession: downward trend in all the economic activities and outcomes,

Depression: it is a severe recession. Extreme reduction in all the economic activities and there is full pessimism in the economy,

Recovery or revival: it is the restoration of economic operation from the depression

Business cycle has been one of the central elementary issues and concepts of economics.

Aggregate Demand and Aggregate Supply

The total amount of goods and services which all the buyers of an economy desire to purchase at a given price and time is called aggregate demand. It is the whole preferred purchase of all the buyers including HHs, business, and government sectors in case of a closed economy.

So goods demanded by the household sector (C), goods demanded by business firms (I), and goods demanded by the government (G) are the component of AD in three sectors closed economy.

Aggregate supply refers to the total amount of output that all the producing units or firms or producers are willing to offer in the market. It is the entire preferred production of all the entreprenuers in the economy.

The price level directly affects the value of aggregate demand and aggregate supply in an economy. These both of the concepts play a significant role in economics and thus they are in elementary issues and concepts of economics.

Basic Economic Entities in an Economy

Economics deals with the economic activities of all the basic entities of an economy. There are large numbers of individuals participating in the economic activities of a different nature. For the well-mannered study of the interaction and function of an economy, we can classify the economic entities into the following groups.

Households

It is a person or group of people living together who make economic decisions about the quantity and types of commodities to be purchased to satisfy their wants and desires.

They are the main owners of the factor inputs and they earned income by selling their factor services to the business and government sector. They are responsible for the consumption expenditure in the economy. Their role is crucial and most prominent in the overall functioning of the economy.

Business Firms/Enterprises

It is defined as the entity which hires and employs factor inputs to produce commodities to sell in the market. It might be a single human being or an association.

They are known as producers, suppliers, and firms in studying economics. They are responsible for investment expenditure in the economy and generate employment of factors owned by HHs.

The Government

It is the apex decision-maker and lawmaking body to regulate, observe, supervise, and control the activities of HHs and the business sector. The government refers to a group of organizations that possess legal and political power and exercises some control over other sectors of the economy.

It includes all the layers of the government and their bodies. The government imposes taxes to HHS and business sectors and provide subsidies and social safety nets to its people and business. It also spends in larger infrastructural projects and social overheads. 

Almost all the elementary issues and concepts of economics are connected with such economic entities and overall matter of economics is made of by the behavior of them.

Stock and Flow Variables

Economics while developing and dealing with its subject matters uses several variables and these are called economic variables. They can be seen as stock and flow variables.

Stock Variables

These are those variables that are expressed as a point of time. They have no time dimension. The stock of capital, wealth, number of workers, total bank deposits, etc are an example of stock variables.

Flow Variables

Flow variables are those variables that are expressed per unit of time. Per hour, per week, per month, etc. are the flow variables. They have time dimensions. Production, national income, consumption, etc are flow variables.

Thus all the economic variables can be viewed as stock as well as a flow variable.

These are the major elementary issues and concepts of economics that have created the wider and ever-growing scope of economics. Therefore we can say that the significance of economics will so long-lasting as long as the significance of human beings will remain.

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