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Value, Price, and Wealth in Economics, Lecture notes of Economics

The concepts of value, price, and wealth in economics. It explains the characteristics of value and wealth, the distinction between wealth and welfare, and the different types of wealth. It also explores the relation between money and wealth, and income and wealth. definitions and examples to help readers understand these concepts.

Typology: Lecture notes

2019/2020

Available from 05/01/2022

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Lecture No.7
Value Definition Characteristics; Price Meaning, Wealth Meaning Attributes
of wealth, Types of wealth, Distinction between wealth and welfare.
Value and wealth
Value
The word “Value” in economics conveys value-in-exchange. It does not include free
goods which have only value-in-use. In other words, value of a commodity refers to those
goods that can be obtained in exchange for itself or purchasing power of a commodity in
terms of other commodities and services. Value can be referred to as the capacity of a
good to command other things in exchange.
Characteristics of Value.
1. It must possess utility
2. It must be scarce and
3. It must be transferable and marketable.
Price
In Pre historic times, people did not know money and they had a barter system in which
goods are exchanged with goods. Therefore, in those days value and price were used
synonymously. But now days, goods are exchanged for money. Therefore, Value
expressed in monetary terms is Price
Wealth
In ordinary language, “Wealth” conveys an idea of prosperity and abundance. A man of
wealth understood as a rich person. But in Economics Wealth is synonymous with
economic goods. In short, Wealth means anything which has value.
Definition: It consists of all potentially exchangeable means of satisfying human wants
(J.M.Keynes)
Characteristics of wealth :
1. It should possess utility
2. It must be scarce
3. It must be transferable
4. It must be external to person
Relation between Money and Wealth : Money is a form of wealth .All money is wealth
but all wealth is not money
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Lecture No. Value – Definition – Characteristics; Price – Meaning, Wealth – Meaning Attributes of wealth, Types of wealth, Distinction between wealth and welfare.

Value and wealth

Value The word “Value” in economics conveys value-in-exchange. It does not include free goods which have only value-in-use. In other words, value of a commodity refers to those goods that can be obtained in exchange for itself or purchasing power of a commodity in terms of other commodities and services. Value can be referred to as the capacity of a good to command other things in exchange. Characteristics of Value.

  1. It must possess utility
  2. It must be scarce and
  3. It must be transferable and marketable.

Price In Pre historic times, people did not know money and they had a barter system in which goods are exchanged with goods. Therefore, in those days value and price were used synonymously. But now days, goods are exchanged for money. Therefore, Value expressed in monetary terms is Price

Wealth In ordinary language, “Wealth” conveys an idea of prosperity and abundance. A man of wealth understood as a rich person. But in Economics Wealth is synonymous with economic goods. In short, Wealth means anything which has value.

Definition: It consists of all potentially exchangeable means of satisfying human wants (J.M.Keynes)

Characteristics of wealth :

  1. It should possess utility
  2. It must be scarce
  3. It must be transferable
  4. It must be external to person

Relation between Money and Wealth : Money is a form of wealth .All money is wealth but all wealth is not money

Relation between Income and Wealth : Income is different from wealth. Wealth yields income. Therefore, Wealth is a fund whereas income is a fl Types of Wealth :

  1. Individual Wealth : It consists of all tangible and intangible possessions of the individuals besides loans due to them. Example: Land, bonds, deposits are tangible possessions while, intangible possessions are copyrights, patents etc.,
  2. Social Wealth : It is the wealth, which is collectively used by all the people in a nation. Example: Railways, Public Parks, Government colleges etc.,
  3. Representative Wealth : It is that form of wealth in the form of title deeds
  4. National Wealth : It is an aggregate of all individuals wealth and social wealth of the country inclusive of loans due to people and to the nation debts have to be deducted. Example: Rivers, mountains.
  5. Cosmopolitan Wealth: It is wealth of the whole word. It is a sum total wealth of all nationals.
  6. Negative Wealth : It refers to the exclusive debts owed by the individuals and the nation.

Wealth and Welfare compared Wealth Welfare It is the means to an end It is the end itself It is objective It is subjective It includes harmful goods It does not include harmful goods It does not include free goods Free and economic goods lead to welfare

Schedule showing marginal utility and total utility Units of apples consumed Total utility in utils Marginal utility in utils

1 7 7

2 11 4 (11 - 7)

3 13 2 (13 - 11)

4 14 1 (14 - 13)

5 14 0 (14 - 14)

6 13 -1 (13 - 14)

The above table shows that when a person consumes no apples, he gets no satisfaction. His total utility is zero. In case he consumes one apple, he gains seven units of satisfaction. His total utility is 7 and his marginal utility is also 7. In case he consumes second apple, he gains extra 4 utils (MU). Thus given him a total utility of 11 utils from two apples. His marginal utility has gone down from 7 utils to 4 utils because he has a less craving for the second apple. Same is the case with the consumption of third apple. The marginal utility has now fallen to 2 utils while the total utility of three apples has increased to 13 utils (7 + 4 + 2). In case the consumer takes fifth apple, his marginal utility falls to zero utils and if he consumes sixth apple also, the total utility starts declining and marginal utility becomes negative. Total utility and marginal utility from the successive utits of the commodity are plotted in the figure below:

i. The total utility curves starts at the origin as zero consumption of apples yield zero utility. ii. The TU curve reaches at its maximum or a peak at M when MU is zero.

iii. The MU curve falls throughout the graph. A special point occurs when the consumer consumes fifth apple. He gains no marginal utility from it. After this point, marginal utility becomes negative. MUa = TUa – TU(a-1)

Importance of the Law:

  1. The law of diminishing marginal utility is the basic law of consumption. The law of demand, the law of equimariginal utility and the concept of consumers surplus are based on it.
  2. The law helps in bringing variety in consumption and production.
  3. The law helps to explain the phenomenon in the value theory that the price of a commodity falls when its supply increases. It is because with the increase in the stock of a commodity its marginal utility diminishes.
  4. The famous diamond – water paradox of Smith can be explained with the help of this law. Diamonds are scarce and hence possess high marginal utility and hence higher price. On the otherhand, water is relatively abundant because of which it possess low marginal utility and low price even though its total utility is high
  5. The principle of progressive taxation is based on this law. As a person „s income increases, the rate of tax rises because the marginal utility of money to him falls with the rise in his income. The law underlines the socialist plea for an equitable distribution of wealth.

Exceptions to LDMU are as follows :

  1. Hobbies: In case of certain hobbies like stamp collection or old coins, every additional unit gives more pleasure. MU goes on increasing with the acquisition of every unit.
  2. Drunkards: It is believed that every dose of liquor Increases the utility of a drunkard.
  3. Miser: In the case of miser, greed increases with the acquisition of every additional unit of money.
  4. Reading: The habit of reading of more books gives more knowledge and in turn greater satisfactions.