I] Classification of goods on the basis of price paid
On the basis of price paid goods are classified as Free goods and economic goods.
Free goods are goods which are given to us by nature and therefore these are goods for which no price is paid. Since they are free gifts of nature there is no cost of production involved. Supply of free goods is more than demand for it ie they are available in abundance and therefore there is no need to economise on their use. Free goods have utility but are abundant in supply and do not have a market value they are not included in wealth. No one is excluded from consumption of free goods ie the principle of exclusion is not applied. Air, water, sunlight etc are free goods.
Economic goods are goods which are manmade goods and therefore are goods for which a price is paid. Cost of production is incurred for production of economic goods. Since economic goods are manmade they are scarce ie supply of economic goods is less than demand for it and therefore we have to make optimum and economic use of these goods. Economic goods have utility but are scarce and have market value therefore they are included in wealth. If a consumer cannot pay he is excluded from the consumption of these goods ie the principle of exclusion is applied. Diamonds, furniture etc are economic goods.
This distinction between free and economic goods is not rigid. A free good in may become an economic good eg air used by deep sea divers is an economic good. Water from the sea or rivers is free but when it comes to human dwellings through pipes we pay a water tax, when it is bottled and sold in the market we pay for it.
Free goods are general conditions of human welfare, they are a part of the natural environment in which man lives and acts. Such goods therefore are not the object of any action. Only economic goods are the substratum of action. They alone are delt with in economics.