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Basic concepts of economics: Class 9 Economics
The meaning of economics, needs and wants, goods and services, utility, scarcity and choice, opportunity cost, factors of production and the law of demand.
Key points
Economics is the study of how people use limited resources to satisfy their unlimited wants. Lionel Robbins defined it as the science that studies human behaviour as a relationship between ends and scarce means that have alternative uses. People have many wants, but the resources to satisfy them are limited, so people must choose.
Needs are things that are essential for life, such as food, clothing and shelter. Wants are things that people would like to have, such as a car or a mobile phone. Wants are unlimited and keep changing, while resources are limited.
Goods are physical things that satisfy wants, such as bread and books. Services are activities that satisfy wants, such as teaching and medical care. Utility is the power of a good or service to satisfy a want. Economists speak of form utility (changing the shape of a material, like wood into a chair), place utility (moving goods to where they are needed), time utility (storing goods until they are needed) and possession utility (transferring ownership by sale).
Scarcity means that resources are limited in relation to wants. Because of scarcity, people must make choices. The opportunity cost of a choice is the value of the next best alternative that is given up. If a farmer can grow either wheat or sugarcane on a field and chooses wheat, the sugarcane that could have been grown is the opportunity cost.
Factors of production are the resources used to produce goods and services, and each earns a reward:
- Land (all natural resources) earns rent.
- Labour (human effort, physical or mental) earns wages.
- Capital (man-made goods used to produce other goods) earns interest.
- Entrepreneur (the person who organises production and takes risk) earns profit.
Demand is the quantity of a good that buyers are ready and able to buy at a given price. The law of demand says that, when other things stay the same, a rise in the price of a good reduces the quantity demanded, and a fall in price increases it. The demand curve therefore slopes downward from left to right.
Study tip: Remember the four rewards with the word RWIP: rent, wages, interest, profit, in the order land, labour, capital, entrepreneur.
Definitions and flashcards
Say the meaning first, then open the card to check.
Economics
The study of how people use limited resources to satisfy unlimited wants.
Need
Something essential for life.
Want
Something that people would like to have.
Good
A physical item that satisfies a want.
Service
An activity that satisfies a want.
Utility
The power of a good or service to satisfy a want.
Scarcity
The shortage of resources in relation to wants.
Opportunity cost
The value of the next best alternative that is given up.
Factors of production
Land, labour, capital and entrepreneur.
Demand
The quantity buyers are ready and able to buy at a given price.
Short questions with model answers
These are the kind of questions asked for 2, 3 and 5 marks. Try each one before opening the answer.
Define economics. (2 marks)
Economics is the study of how people use limited resources to satisfy their unlimited wants. It deals with choice because resources are scarce.
Differentiate between needs and wants. (2 marks)
Needs are things that are necessary for life, such as food and shelter. Wants are things that people would like to have but can live without, such as a car. Wants are unlimited.
What is meant by scarcity? (2 marks)
Scarcity means that resources are limited in relation to human wants, so all wants cannot be fully satisfied.
What is opportunity cost? Give an example. (3 marks)
Opportunity cost is the value of the next best alternative that is given up when a choice is made. If a student spends the evening playing cricket instead of studying, the lost study time is the opportunity cost.
Name the four factors of production and their rewards. (3 marks)
Land earns rent, labour earns wages, capital earns interest and the entrepreneur earns profit.
State and explain the law of demand. (5 marks)
The law of demand says that, other things remaining the same, a fall in the price of a good increases the quantity demanded, and a rise in price reduces the quantity demanded. For example, if the price of oranges falls, people buy more oranges. The reason is that at a lower price the good is cheaper compared with other goods and more people can afford it. The demand curve slopes downward.
Numericals with worked steps
A farmer can use a field to produce 100 kg of wheat or 60 kg of sugar. He chooses wheat. What is the opportunity cost?
- The opportunity cost is the next best alternative that is given up.
- By choosing wheat he gives up the sugar.
Answer: 60 kg of sugar
The price of a pen falls from Rs 20 to Rs 15. The quantity demanded rises from 100 to 140 pens. Is this in line with the law of demand? Explain.
- The price has fallen from Rs 20 to Rs 15.
- The quantity demanded has risen from 100 to 140.
- The law of demand says that quantity demanded rises when price falls, other things remaining the same.
Answer: Yes. The fall in price led to a rise in quantity demanded.
Common mistakes
- Treating opportunity cost as the money paid. It is the value of the best alternative given up.
- Writing that rent is the reward of labour, or wages the reward of land.
- Saying that demand rises when price rises, when the law says quantity demanded falls.
- Confusing a good with a service.