Information Sheet
Rural Economics
First Semester
Review of Economic terms and concepts
Objectives
 Be able to explain and define economics
 Be able to explain and illustrate the various economic concepts
What is Economics.
Economic is a broad ranging discipline, both in the questions it asks and the methods it uses.
Economics is involved in almost every aspect or activity of life. Thus there exists many definitions
depending on what aspect of life is under consideration. Economics is concerned with human
behaviour in the activities of production, consumption (utilisation) and exchange of goods and
services.
Economics has to do with making decisions regarding the use of time, money, and other resources.
Because resources are limited or scarce, these choices must be made; that is, if you choose one
thing, you must give up another. If you choose to use your time to care for cows, you cannot use it
to plant maize, if you plant field to potato, you cannot plant it to soyabeans; etc. Economic
principles provide the framework to guide the decision making process.
Definition
One could come across many economic definitions, but the most common feature of various
existing economic definitions include the use and management of scarce resources to satisfy
economic aims and objectives. One such definition is;
Economics may be defined as the study or science of how human beings (individual or in groups)
make decisions concerning the allocation and use of scarce resources such as land, labour and
capital to achieve given goals, wants or desires.
In other words the subject of economic science is to study the problems of choice involved in the
decision on the use of scarce resources with alternative useful applications. (Deals with decision
making and the consequences thereof).
Economics and Ecology
The original root of word ‘economics’ is same with the word ‘ecology’. Both originated from the
Greek word
‘eco’
- household
‘logy’
- study of the logic that maintains household or the environment of man
‘nomy’ - science that deals with the distribution and management of resources.
Elements of Economics
The Human being
The human being or the man is the central focus in the study of economics because it deals with
human behaviour. Therefore, often economics is referred as "social science" In the study of
agricultural economics the farmer, researcher, extension agent and the buyers of agricultural
produce are the social elements.
533576548
1
Information Sheet
Rural Economics
First Semester
Ends or human wants
These are the things we would like to have, to do, to see, to hear, to smell, to happen, etc. They are
so many that it is impossible to satisfy all at one time. They are continuously changing, and
generally human wants are unlimited at a given time, that is more we have more we want. The
satisfaction of existing wants leads to the creation of new wants.
Means or ways (resources)
These are the physical and other capacities and capabilities available to be used to satisfy wants.
They are generally scarce or limited in nature at anyone time. Even if a resource may appear
unlimited at a given time, limitations in other resources may constrain the ways in which they can
be combined to satisfy wants. For example a farmer wanting to produce one ton of wheat, paddy,
barley, etc. could be limited by labour although he has enough land.
Alternative uses of means
The means could be used for acquiring different wants. In other words, the limited or scarce
resources have multiple use, that is, they have more than one use. For example, a farmer can use
his langdo of wetland to cultivate paddy, wheat, vegetables, or any appropriate crop. Once he/she
decides to plant, say paddy, on that langdo for the monsoon, he cannot grow other crops on it at the
same time. The alternative use of scarce resources makes the decision making more complex.
The relationship between satisfaction of unlimited wants with the scarce or limited resources which
have alternative uses, form the frame or situation upon which economic principles are derived.
Some Economic Terminologies
1. Concept of Opportunity cost
The value of the next best alternative that is given up to use or produce a commodity or service. If
we make use of goods in a certain way, we forsake alternative opportunities for a useful
application. This implies that we sacrifice these alternative opportunities. The costs of the input
therefore should be measured by the most attractive use which is sacrificed. For example the real
costs for the milk used for rearing calves is determined by the price we can obtain by selling the
milk at the farm gate. The real cost of the additional feed obtained by replacing one acre of cash
crop by a feed crop will be determined by the income lost from one acre of cash crop.
2. Concept of scarcity
Something available but not sufficient to satisfy all wants. The scarcity is the root of all farm
economic problems involving choice and management. The value of a commodity influenced by its
relative scarcity. Scarcity is an indispensable concept in economic reasoning. It is also a relative
concept. It means that the available quantity of some goods is scarce in relation to the uses which
we could be made thereof. This implies that by making a specific use we must sacrifice alternative
opportunities for useful application. For example, by using part of the land for feed crops we
sacrifice the opportunity to grow a cash crop. By using the milk for rearing calves, we forsake the
opportunity of selling the milk to a factory.
3. Economic principles
The economic principles are generalisations about the economic behaviour of individual or groups
of individual with regard to the use of limited resources to satisfy given wants. They constitute
laws and concepts that describe the economic relationship that exists between the satisfaction of
unlimited wants/desires and the use of scarce and limited resources. They are used as tools or rules
Basic Economic concepts/TS/2001
2
Information Sheet
Rural Economics
First Semester
that permit quick and concise explanations of economic relationship. For example, the law of
supply says that, all other things remaining constant, an increase in quantity of a given commodity
that is marketed leads to a fall in the price of that commodity.
The economic principles are laws and concepts that describe the economic relationship between
the satisfaction of wants and the use of limited resources.
Economic principles provides a quick and concise explanation of economic relationships.
All economic problems (practical and theoretical) are explained by economic principles and
concepts.
4. Choice
Refers to choosing one thing instead of another. The choice is a critical problem in making
economic decisions. The problem of choice arises mainly due to the scarcity of means (resources),
alternative use of resources and unlimited human wants.
5. Scale of preference
Listing of possible wants in priority, usually putting the ones that needs to be satisfied first on the
top followed by those which can be met at a later stage or time. Listing of preference of an
individual, region, nation, etc. is influenced by the urgency of needs and availability of
resources/means.
6. Utility
It is the power of a commodity or service to satisfy a human want. The utility is subjective, - varies
from one individual to another. In general the utility is influenced by the usefulness of a
commodity/service, quality and how much of it the consumer has already. The concept of utility is
important to study the behaviour of the consumers.
The different types of utilities are; form utility, time utility, place utility and service utility.
7. Economic facts
The economic facts refers to those actual observations of how individuals and institutions actually
behave in producing, enhancing and consuming goods and services
Note that theories and principles are meaningful statements that are drawn from facts. On the other
hand, facts serve as a constant check on the validity of already established theories and principles.
The relationship between the theories and facts has been aptly expressed thus by Kenneth Boulding:
"Theories without facts may be barren, but facts without theories are meaningless"1. This makes it
essential for the economist to continuously check existing theories and principles against the
changing economic environment or reality. Theories that do not measure up to facts should be
discarded, and new theories should be developed and expounded in response to facts.
1
Kenneth E. Boulding, Economic Analysis: Microeconomics, 4th edition,(New York: Harper and Row,
Publishers, Inc., 1966), p.5
533576548
3