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Lesson Explainer: Basic Economic Concepts Economics

In this explainer, we will learn how to compare different types of needs, resources, and goods and describe the effect of needs on economic activities.

Economic issues are pervasive in today’s society. Every day, we encounter news about large fluctuations in stock prices, new government policies to alleviate poverty, free trade agreements between countries around the world, and many other things. These are very important and complex economic issues profoundly impacting our lives, but it would be too hasty to jump straight into these topics. In order to understand these issues well, we need to first study basic economic ideas.

In fact, economic issues reside much closer to us than we realize since basic economic ideas begin with an individual. Companies, national governments, and international organizations are larger economic entities whose basic building blocks are individuals. Hence, it makes sense to begin the study of economics by examining how individuals lead to complex economic issues in larger entities.

At the heart of any economic issue lies individuals’ needs and wants. This is evident since, if people do not need or want anything, there would not be any economic activity in the society. Since these are the basic driving force of all economic activities, we should take great care to understand their characteristics.

Before we give formal definitions to these terms, let us discuss a few preliminaries. In the study of economics, we often employ commonly used terms and give formal definitions that may significantly differ from their “normal” connotations. The subject-specific usage of these terms will generally be related to the terms as used in our everyday language, which helps them to be more familiar to us. However, we should remember their formal definitions when using them in the context of this subject. For example, we will encounter terms such as free resource, which, in everyday language, would seem to imply that it has zero cost associated with it, but, in economics, the term has a specific and different meaning from this.

Sometimes, we will make assumptions that understate the complexity of the real world to create a simplified working model. This is necessary because, in order to understand the fundamental elements involved in economic issues, we need to first understand the big picture rather than dwell on the details. While some of the details may reemerge as important concepts in future lessons, the insights we gain from analysis of our simplified models are very useful. When we start to learn about economics, we may find some of the terms a bit ambiguous or disagree with some of the statements or assumptions, but we will explore these issues later. It is important to think critically in this subject to be aware of the assumptions we are making and to think about the differences that could be made by small changes to the models or assumptions.

Let us begin by formally defining what we mean by needs in economics.

Definition: Needs

A need of an individual is a feeling of distress leading the individual to act to diminish or satisfy the need.

We note that the formal definition of human needs is very general, encompassing various aspects of an individual’s motivation to act not just economically but also socially and politically. We can take a moment here to reflect on various needs in our own lives. For instance, we all have a need for food each day, and we also have a need for education. While they are both needs, the former is a need that is essential for our survival, while the latter is one that is not as urgent. Hence, we can categorize an individual’s needs into two types as defined below.

Definition: Primary Needs and Secondary Needs

Primary needs are needs that are essential for survival, while secondary needs are ones that achieve happiness of the individual or improve the condition of the society. Secondary needs are also referred to as wants.

Since food is essential for our survival, it is an example of a primary need, while education is a need to achieve the happiness of the individual, so it is an example of a secondary need or want.

In our first example, we will identify a primary human need from a list of primary and secondary human needs.

Example 1: Identifying Types of Human Needs

Which of the following is a primary human need?

  1. Justice
  2. Shelter
  3. Wealth
  4. Security
  5. Education

Answer

In this example, we will identify an example of primary human needs. We recall that a need of an individual is a feeling of distress leading the individual to act to diminish the need. Needs are divided into primary and secondary needs, where the primary needs are needs that are essential for the individual’s survival and the secondary needs are ones that achieve happiness for the individual or improve the condition of the society. Hence, we need to identify which of the needs given in this example is essential for one’s survival. Let us consider each example.

  1. Justice is not essential for one’s survival, but it serves to improve the condition of the society. Thus, this is an example of secondary needs.
  2. Shelter is essential for one’s survival, so this is an example of primary needs. The absence of a shelter would immediately lead to a lower chance for an individual’s survival.
  3. Wealth is not essential for one’s survival, but it serves to achieve happiness for the individual. Thus, this is an example of secondary needs.
  4. Security is not essential for one’s survival, but it serves to improve the condition of the society. Thus, this is an example of secondary needs.
  5. Education is not essential for one’s survival, but it serves to achieve happiness or improve the social well-being of the individual. Thus, this is an example of secondary needs.

Option B, shelter, is an example of primary needs.

In the previous example, we considered different examples of human needs and identified which one belonged to primary needs. While the needs listed in this example are common for all individuals, each individual also has unique needs that are not shared by others. For instance, a person may have a secondary need to tour Italy, but this need is not shared by everyone. In this sense, human needs are diverse as well as unlimited. These characteristics of human needs are the true driving force behind all economic issues. Let us examine the characteristics of human needs.

  • Human needs can be satisfied by a suitable activity. Satisfying a need decreases or diminishes the feeling of distress. After the initial satisfaction of a need, additional actions toward the same need produce lesser effects. For instance, the need to tour Italy can be satisfied by traveling around the country, which decreases the feeling of distress due to this need. Taking a second trip to Italy may still lead to satisfaction, but its effect will not be as significant as the initial trip.
  • The number of an individual’s needs always increases with time. This is because the satisfaction of a specific instance of a need is followed by the development of a new need as well as the renewal of the same need. For example, after satisfying the need to tour Italy, the individual may develop a new need to tour a different country as well as renew the need to tour Italy another time. For this reason, the amount of human needs in a society is unending and limitless.
  • Human needs are diverse and widely varied across different individuals. For instance, one individual may have a need to tour Italy, while another individual may have a need to read a novel. The needs of an individual who lives in a wealthy neighborhood will be much different from the needs of homeless individuals.

Hence, we can summarize the characteristics of human needs in the following three words: satisfaction, increase, and diversity. Let us consider an example where we look at these characteristics of human needs.

Example 2: Characteristics of Human Needs

Which of the following is not true of human needs?

  1. Satisfying a human need diminishes the feeling of distress.
  2. When a need of an individual is satisfied, the individual will not encounter the same need anymore.
  3. The number of a person’s needs increases with time.
  4. Human needs are widely varied depending on individuals.

Answer

In this example, we need to determine a statement that is not true of human needs. We recall that a need of an individual is a feeling of distress leading the individual to act to diminish the need. We also know that human needs are characterized by their satisfaction, increase, and diversity. Let us consider each of the given statements.

  1. This statement relates to the satisfaction of needs, which is a characteristic of human needs. This is an accurate statement concerning needs.
  2. While the satisfaction of a need releases the feeling of distress, an individual soon renews the same need. Hence, this is not an accurate statement concerning needs.
  3. This statement relates to the increase of needs, which is a characteristic of human needs. This is an accurate statement concerning needs.
  4. This statement relates to the diversity of needs, which is a characteristic of human needs. This is an accurate statement concerning needs.

Option B is not true of human needs, since satisfying one need is followed often by a renewal of that need.

Having characterized human needs, we will now consider how they are related to economic issues. First, we need to define what we mean by an economic activity.

Definition: Economic Activities

An economic activity refers to the production, distribution, or consumption of goods and services.

In this definition, goods are tangible items such as cars or apples, while services are intangible items such as a haircut or education. In other words, the term economic activity encompasses anything from manufacturing a car (production of goods) or giving a haircut (distribution of services) to eating an apple (consumption of goods). Our daily lives are filled with a great variety of economic activities. Whether it is eating a meal at home, learning a lesson at school, or purchasing a toy on the internet, we are participating in economic activities each day.

At the very heart of every economic activity are human needs that motivate it. While an economic activity may not directly satisfy a human need, all economic activities are motivated by either directly or indirectly satisfying human needs. This is why human needs are the most basic building block of economics. Without human needs, our society would lack any economic activity.

Just as the needs of different individuals are widely varied, economic activities vary from person to person. Even when two individuals have the same need, they may each generate different types of economic activities in order to satisfy their needs. For instance, say that two individuals have the need to learn about Italy. One person may satisfy the need by traveling to Italy, while the other person may satisfy the same need by purchasing and reading books about Italy.

In the next example, we will consider the nature of the relationship between human needs and economic activities.

Example 3: Human Needs and Economic Activities

Which of the following correctly describes the relationship between human needs and economic activities?

  1. An economic activity produces a human need.
  2. Each human need motivates an economic activity.
  3. Each economic activity directly satisfies a human need.
  4. The eventual goal of any economic activity is to satisfy a human need.

Answer

In this example, we need to identify a statement that correctly describes the relationship between human needs and economic activities. Let us first recall the definition of these terms: a need of an individual is a feeling of distress leading the individual to act to diminish the need, while an economic activity refers to the production, distribution, or consumption of goods or services. We also recall that all economic activities are motivated by either directly or indirectly satisfying human needs. Let us consider each of the given statements.

  1. The relationship between an economic activity and a human need in this statement is backward. Human needs motivate economic activities rather than the other way around. Hence, this statement is false.
  2. While we know that the aim of all economic activities is to satisfy human needs, it is not accurate to say that each need motivates an economic activity. An individual may have the need to go for a quick walk around the neighborhood, which does not lead to any production, distribution, or consumption of goods and services. Hence, this statement is false.
  3. We know that each economic activity aims to eventually satisfy a human need. However, an economic activity may indirectly satisfy a need, rather than directly. For instance, to satisfy the needs of individuals to read a novel, a factory may manufacture paper to be used in the book. This factory is indirectly satisfying the needs by providing a material that can be used for the production of the final goods, which are books. This is an example of an economic activity indirectly satisfying a human need. Hence, this statement is false.
  4. We know this to be a true statement. In fact, we know that needs of individuals in a society are the driving force behind all economic activities. Every economic activity has the goal of either directly or indirectly satisfying a human need.

Option D is correct, as economic activities are aimed at satisfying human needs.

So far, we have learned about different types of human needs and how they drive a variety of economic activities in our society. Satisfying the diverse and limitless human needs requires resources, which is next in our list of economic terms to discuss.

Definition: Resources

In economics, a resource is a means by which an individual’s need may be directly or indirectly satisfied.

For instance, an apple tree is a resource since it provides apples for individuals, and a river is a resource because it provides water for civilizations. A nurse is a resource for individuals with health-related needs, and a car is a resource for individuals with a need for transportation. As we can see, not only are there many different examples of resources we can find in our daily lives but there are also many different categories for resources. We can define these categories by using three different features of resources: renewability, scarcity, and present form.

According to renewability, resources are said to be either renewable or non-renewable. A renewable resource, such as a forest, can regenerate itself after a sufficient amount of time has passed. Other examples of renewable resources are fish, apples, and sunshine. Nonrenewable resources exist in limited amounts, and society’s consumption of these resources continually decreases their quantities. Examples of nonrenewable resources are petroleum, gold, and coal.

According to scarcity, resources are said to be either scarce or free. Scarcity is a relative measure, and a resource is considered scarce only if the needs for the resource exceed the existing quantity. We can see many examples of scarce resources every day, such as pencils, apples, or cars. Free resources exist in quantities that far exceed their demand. Examples include air, water, and soil.

Lastly, resources can be classified according to their present form as natural, human, or capital. Natural resources exist in nature, such as a forest, a river, or a gold mine. Human resources are humans who can provide services, such as a nurse, an author, or a farmer. Capital resources are goods that have been produced by humans, such as a car, a pencil, or a computer.

In our next example, we will identify a capital resource from a given list of resources.

Example 4: Identifying capital Resources

Which of the following is an example of capital resources?

  1. A car
  2. Petroleum
  3. A hairstylist
  4. A forest

Answer

In this example, we need to identify which of the given resources is an example of capital resources. We recall that a resource is a means by which an individual’s need may be directly or indirectly satisfied. Since a car, petroleum, a hairstylist, and a forest can satisfy different human needs, these are all examples of resources. We also recall that resources are classified as either natural, human, or capital according to their present form. Let us recall the characterization of each type:

  • Natural resources exist in nature.
  • Human resources are humans who can provide services.
  • capital resources are goods that have been produced by humans.

Hence, we need to identify which from the given list has been produced by humans. Let us consider each option.

  1. A car is produced by humans, so this is an example of capital resources.
  2. Petroleum is a resource that exists in nature, so this is an example of natural resources.
  3. A hairstylist is a human who can provide services, so this is an example of human resources.
  4. A forest is a resource that exists in nature, so this is an example of natural resources.

Option A , a car, is an example of a capital resource.

In the previous example, we discussed different types of resources. Let us turn to different types of goods, which are tangible items in economic activities. Since goods are included in economic activities, which aim to satisfy human needs either directly or indirectly, we know that goods always satisfy human needs. We can categorize goods by considering whether they satisfy human needs directly or indirectly.

Consumption goods are goods that directly satisfy human needs. Examples of consumption goods include apples for eating, houses to live in, and computers to use for enjoyment. Capital goods are goods that indirectly satisfy human needs. Examples include paper used to print books, a computer chip used to make a computer, and apples used to make apple juice.

We should pause here for a moment to note that an apple is listed above under both consumption goods and capital goods. This is because the distinction between consumption and capital goods is not inherent in the goods themselves but in how they are used to satisfy human needs. In the first instance, we assumed that an individual would eat an apple to directly satisfy a need for food. This direct satisfaction of needs leads this to be defined as an example of consumption goods. In the second case, apples were used to produce apple juice that is then consumed to satisfy a human need. Since these apples went through a production stage to become apple juice before satisfying a human need, they indirectly satisfied a human need, which is why they were classified as capital goods here.

In our final example, we will identify an example of capital goods from a given list.

Example 5: Identifying Capital Goods

Which of the following is most likely to be an example of capital goods?

  1. Jewelry
  2. A car
  3. Leather
  4. A television

Answer

In this example, we need to identify an example of capital goods. We recall that goods are the tangible items in economic activities that are used to either directly or indirectly satisfy human needs. Goods satisfying needs directly are called consumption goods, while goods satisfying needs indirectly are called capital goods. Hence, we need to determine which of the given examples is a good that satisfies human needs indirectly.

Since the distinction between capital and consumption goods is not inherent in the goods themselves but is rather reflective of how they are used to satisfy needs, we need to consider how these goods may be used to satisfy different human needs.

  1. Jewelry can satisfy a human need to appear more beautiful. This would be an example of goods directly satisfying human needs, which would make this a consumption good.
  2. A car can directly satisfy a human need for transportation. Hence, this is an example of consumption goods.
  3. Leather is often used to produce clothing items that are then used to satisfy a human need for clothing. In this case, leather is indirectly satisfying a human need for clothing, which makes it an example of capital goods.
  4. A television can directly satisfy a human need for entertainment. Hence, this is an example of consumption goods.

Option C , leather, is the most likely to be an example of capital goods.

Let us finish by recapping a few important concepts from this explainer.

Key Points

  • A need of an individual is a feeling of distress leading the individual to act to diminish or satisfy the need.
  • Primary needs are needs are essential for survival, while secondary needs are ones that achieve happiness for the individual or improve the condition of society. Secondary needs are also referred to as wants.
  • Human needs are characterized by their satisfaction (it is possible to satisfy a human need), increase (human needs increase over time), and diversity (there is a diverse range of human needs).
  • An economic activity refers to the production, distribution, or consumption of goods (tangible) and services (intangible).
  • In economics, a resource is a means by which an individual’s need may be directly or indirectly satisfied. Resources can be classified as follows:
    • In terms of their renewability, renewable or nonrenewable
    • In terms of their scarcity, scarce or free
    • In terms of their present form as natural, human, or capital
  • Goods can be classified according to how they satisfy human needs. Consumption goods directly satisfy human needs, while capital goods indirectly satisfy human needs.

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