1.3 Review: Introduction to the fundamental concepts of economics

Lecture I: Introduction to the fundamental concepts of economics
This lecture is based on Chapters 1-3 from Carl Menger's Principles of Economics.


  • Useful things we can direct to the satisfaction of our needs.
  • Prerequisites for a thing becoming a good:
  1. A human need.
  2. Properties that can make the thing cause the satisfaction of this need.
  3. Human knowledge of this causal connection.
  4. Command of the thing sufficient to direct it to the satisfaction of the need.

Economic goods

  • Difference between economic and non-economic goods: scarcity.
  • Demanded quantity of economic goods is larger than the available supply.
  • Scarcity makes us value goods.

Economics is the study of human choices under scarcity

  • Our attempts to find solutions to the problem of the disparity between what we want and we have.Economics studies the choices imposed by scarcity, and their consequences.

Opportunity Cost

  • Human time is limited. Every economic choice involves an alternative forgone. The cost of doing anything must include the cost of the forgone alternative. An action's opportunity cost is the cost of the most valuable alternative forgone to undertake it.


  • Wealth: The entire sum of economic goods at an economizing individual’s command.


  • Non-economic goods have utility but no value. Economic goods have utility and value.
  • Scarcity means we have to value goods, and make choices between them. Scarcity forces us to economize, and we economize by developing our subjective valuations of different goods and choosing between them.
  • Oil, for example, was considered dirt that you had to pay to get removed from a land to use it. It was considered to have negative value. With the invention of the internal combustion engine, it became very valuable. The oil itself has remained the same, but human valuation of it changed, and now it is a highly valuable and essential commodity.

Value is subjective

  • Value cannot exist outside human valuation and choices, reflecting humans' own preferences and valuations. Value cannot be an objective property of objects, it is a conscious phenomenon in our minds. This does not mean value is not real. It is real and meaningful.
  • Value cannot be measured and expressed objectively, it is subjective. This means it is ordinal, not cardinal.
  • Ordinal valuation: valuing objects in relation to one another.

Examples: A is more valuable than B. B is more valuable than C.

Cardinal valuation: Precise numerical valuation

Examples: The value of A = 14.372x, the value of B = 4.258x, the value of C = 1.273x

  • In order for any measurement to be possible, there must be a fixed objective unit defined and used to measure. But human valuations cannot be measured with an objective unit. They cannot be multiplied, added, or subtracted. There are no constants relations in economics, so measurement is not possible.
  • Humans don't value things cardinally. Most valuable things aren't even priced: family, friendship, reputation, etc...
  • Value is not measured with market prices. Market prices only give us indicators of upper or lower bounds of individual valuation.

Free Exchange and Subjective Value

  • Trade only happens when individuals exchange things at different valuations. The seller values something less than its price, while the buyer values it more than its price. Only because their valuations differ can an exchange price be found.
  • If people choose to exchange, then they both benefit from the exchange. Otherwise, they wouldn't choose to exchange. If they benefit from the exchange then it necessarily follows that each of them received something they value more than what they gave up. That means they have different valuations of the same thing. Value cannot be objective if it differs from one person to another.
  • The fundamental difference between Austrian economists and other schools is that Austrians believe value is subjective. Other schools have some objective measure of value. Some think value is objectively determined by the amount of work that went into the good. Others think value is the same as market price.
  • In Austrian economics value is subjective and depends on the time and place at which the valuation happens. Value is derived from human choice which is necessitated by scarcity. Value is assigned by individuals to each unit at the time and place in which they make decisions, but is not a universal property of the good. Understanding this property of value helps us understand how decisions take place.


  • Since the value of goods is derived from their ability to provide us with satisfactions, and since different satisfactions have unequal value to us, the value of different units of the same good will also be unequal, as it depends on the satisfactions they meet. The same good will have a different value to the same person depending on what need of his it meets.
  • Individuals use the first unit of a good to meet the most important and pressing needs related to it. They will use the second unit to meet the second most pressing need. As the quantity of the good they own increases, the needs that are met are less valuable and less pressing.
  • Valuation happens at the margin.
  • The value of the good at any point in time is equal to the value of the least important need it fulfills. The value relevant to your choice of a good is the value of the last need it fulfills.
  • There is no such thing as the objective value of good X; there is only the value of the next (marginal) unit of good X to the person making the valuation. This is dependent on many things, including the quantity of X that is owned by the valuing individual.
  • The value of a good to a person at any point in time depends on which need it satisfies. The more a person has of something, the less the valuation they attach to it.

Law of diminishing marginal utility

  • The marginal utility declines with each extra unit of a good.
Last modified: Monday, July 26, 2021, 2:39 PM