Introduction to Economics

1
Introduction to Economics

• Chapter 2
• Wants, Goods and Costs
• J. Patrick Gunning
• March 27, 2021

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Topics Discussed in This Chapter

• The meaning of wants in economics.
• The many concepts associated with the idea of a
  good.
• The concept of cost in economics.

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Wants

• Definition the ends that we assume people have
  when they make choices in market interaction.
• Example the supermarket shopper.

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Wants vs. Needs

• Needs inherited or learned drives. Individuals
  must behave according to their needs they have
  no real choice the need controls their behavior.
  They will be physically damaged if the need is
  not met.
• Wants a person can choose to satisfy them or
  not. Although he will feel better off if he
  chooses to satisfy his wants, he is not compelled
  to do so.

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New Subject A Good

• A good may be a thing or an action.
• In economics the term goods ordinarily includes
  services.
• Goods satisfy wants directly. Resources satisfy
  wants indirectly.

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Two Requirements For A Thing To Be A Good

• 1. It must satisfy a want directly.
• 2. To obtain the thing or to cause the action to
  be performed, the subject must sacrifice other
  satisfaction.

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Generalized Wants and Specific Goods

• Different goods can satisfy the same class of
  wants.
• A want for recreation can be satisfied by seeing
  a movie, hiking, boating, or working on a home
  improvement project.
• The same good can satisfy different classes of
  wants.
• A holiday may satisfy a want for sightseeing and
  a want for relaxation. A home improvement project
  may satisfy a want for saving and a want for
  enjoyment.

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The Goods People WantChange Over Time

• Wants seem to change with aging, with travel, and
  with other experiences.
• Some changesare partly predictable some are not.
  , Example of predictable changes changes in
  parents wants for childrens clothing and older
  peoples wants for memorabilia.
• A businessperson (and student planning for a
  future career) can profit by successfully
  predicting how wants will change.

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Time Preference

• Definition a desire to have goods in the near
  future compared with a desire to have goods in
  the more distant future.
• Practically everyone always wants goods both in
  the near and distant future.
• Practically no one wants to be left without
  goods in the near future or without goods in the
  distant future.
• Therefore, we assume that people have time
  preference.

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Consequences of Time Preference

• Investment in goods that provide services over a
  long period of time. Examples house, car,
  clothes washer.
• Lending to others.
• Investing in bonds, stocks, and property.

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High and Low Time Preference

• Compared to a person with low time preference, a
  person with high time preference prefers to have
  satisfaction in the nearer future.
• Compared to a person with high time preference, a
  person with low time preference prefers to have
  satisfaction in the more distant future.

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Relative Nature of Wants for Specific Goods

• All wants are relative in economics.
• Everything has a price.
• Example of the baby seller. If the price was high
  enough, the money received could be used for many
  things.
• Economics assumes that all goods have a price. It
  is only concerned with goods.

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Free Goods?

• Examples of free goods meditation, a sunrise.
• Economics is not concerned with free goods.
• In other words, it is only concerned with goods
  for which a sacrifice must be made to enable one
  to consume them.

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Preference Structure

• Preference structure an imaginary photograph of
  an individual's relative wants.
• Example a supermarket shopper deciding how to
  spend a given amount of money.
• Economists assume that individuals have a
  preference structure, but they cannot be certain
  what it is.

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Marginal and Inframarginal Units

• Marginal unit the last or next unit or a good or
  resource.
• Inframarginal units units earlier in the series
  than the last one.

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Choices and Marginal Units (1)

• When a person makes a choice, he chooses the last
  unit over the next unit or units of something
  else. He compares marginal units.
• Example a supermarket shopper who must spend all
  of her money (her budget) on two goods. (We
  assume that the price per unit of each good is
  low compared with her budget.)

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Choices and Marginal Units (2)

• Choices reveal preferences for marginal units.
• Choices do not reveal preferences for
  inframarginal units.
• The example of a supermarket shopper who spends
  more money on soft drinks than apples. This does
  not show that she prefers soft drinks to apples.
  It only shows that she prefers the last soft
  drink over the next amount of apples she could
  buy with the money spent on the last soft drink.

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Choices and Marginal Units (3)
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The Water-Diamond Paradox

• Everyone knows that water is more useful than
  diamonds.
• Why does a gram of diamonds have a higher price
  than a gram of water?
• The marginal gram of diamonds has a higher value
  than the marginal gram of water in terms of what
  a typical person is willing to sacrifice to get
  it.
• The inframarginal grams of water have a higher
  value than the marginal grams of diamonds in
  terms of sacrifice.

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Marginal Characteristics of Goods

• These are important when a choice is made of
  whether to buy only one of an item.
• Examples cars, refrigerators, TV sets, and
  clothes washers, houses, a personal burial plot.

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Perishable, Durable andRe-usable Goods (1)

• Definitions
• Perishable good a good that will be worthless if
  it is not used shortly after it is produced.
  Examples many food items.
• Durable good a good that retains want-satisfying
  capacity over a long period. Examples a peanut
  a car.
• Re-usable good a durable good that continues to
  retain its want-satisfying capacity after it is
  used. Example shoes, gold. A peanut is durable
  but not re-usable.

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Perishable, Durable andRe-usable Goods (2)

• Goods that would otherwise be perishable can be
  made durable through techniques of preservation
  canning, smoking, drying, freezing.
• We can never be certain that a highly durable
  thing will always be a good an example is a
  record player.

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Perishable, Durable andRe-usable Goods (3)

• A "perfectly re-usable" good would lose none of
  its capacity to satisfy wants after it was used.
  Is gold an example?
• An "imperfectly re-usable" good would lose some
  value but its lost value could be restored at a
  cost. Distilled water.

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Deterioration and Obsolescence

• Deterioration the property of a material object
  that renders it less capable of performing the
  function for which it was produced.
• Example non-preserved food items rusting metal.
• Obsolescence the state of a former good or
  resource which has lost value in exchange due to
  a reduced demand for it.
• Example record player, black and white TV,
  typewriter.

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Depreciation and Appreciation

• Depreciation a fall in price of a durable good
  or resource.
• Appreciation a rise in price of a durable good
  or resource.

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The Same Class of Good May Have Different
Characteristics

• Economists often assume that all of the units of
  a given class of good are alike.
• In fact, there may be vigorous competition among
  the producers of the same class of good with
  somewhat different characteristics.

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Complementary and Substitute Goods

• Complementary goods a consumer expects two goods
  to provide greater satisfaction when used
  together than when used separately each good
  complements the other.
• Substitute goods a consumer believes each of the
  goods can be used to satisfy the same want.

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Goods That Satisfy Joint Wants

• Some goods or actions can satisfy one person's
  want only if they are not used to satisfy the
  want of another person a cup of coffee. We can
  say that individuals have competing wants for
  this good or action.
• Other goods satisfy the wants of more than one
  person at the same time entertainment. We can
  say that individuals have a joint want for the
  good or action. Non-separable goods satisfy joint
  wants.

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How Do We Know X is a Good?

• This is difficult to answer because different
  people regard different things as goods.
• We cannot read peoples' minds. We can only tell
  whether a thing or action is a good by observing
  behavior and making a judgment about whether the
  behavior was chosen.
• Every example of a good is hypothetical. That is,
  we assume that a particular item is regarded by
  people as a good.
• To say that an item is a good may be inserting a
  personal value judgment the case of national
  defense.

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Cost

• Opportunity cost of an item the satisfaction
  from other items that must be given up to obtain
  it and to get it into a position to satisfy
  wants.
• Opportunities to satisfy one's wants by using
  time are part of the opportunity cost of a good.
• Time usually as an opportunity cost in the sense
  that the time could be used to produce or consume
  something else.

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Events That Can Be Explained By the Opportunity
Cost of Time

• Why do people spend more money to commute to work
  in their cars instead of taking less expensive
  transportation?
• Why are convenience stores, where the prices of
  the same goods are higher, are often located near
  supermarkets?
• Why do people incur greater risk by driving their
  cars at high instead of low speeds?
• Why are personal service businesses such as
  house-cleaning and gardening successful?