Three Fundamental Concepts of Economics Essay Example for Free

Three Fundamental Concepts of Economics Essay 1. Human wants. —Two characteristics of human wants possess great importance in their bearing upon the production and consumption of wealth. First, there seems to be no limit to the number of wants of which a human being is capable. This is one reason why most people find saving so difcult; any growth of income is speedily outdistanced by the growth of wants. This characteristic also ex-plains why a general overproduction of wealth is impossible; there may be too much of one thing but not too much of all things. It also accounts for the al-most infinite variety of goods found in the markets of any modern city. Second, the continued gratification of any single want finally leads to satiety and may become even tedious and irksome. It is a well-known fact of everyday life that any pleasure loses its zest if indulged in too long. 2. Law of diminishing utility. —The fact that we get less and less satisfaction out of the continued gratification of any single want is so important that it is laid down as a fundamental proposition and is known as the law of diminishing utility. It may be stated as follows: The intensity of any utility, or of a mans desire for any good, tends to decline as he consumes successive units of it. This law doubtless has both a physiological and a psychological basis. Sports weary certain muscles and finally cease to give pleasure. The hungry man gets great satisfaction out of the first few minutes of his dinner, but his enjoyment of the meal soon begins to decline. A man who is already the owner of a silk hat, is not profusely grateful if a friend sends him a second silk hat as a Christmas gift, and if he gets a third on his next birthday he will probably look at it gloomily and wonder if he has some friend or relative whose head it will fit, for to him it is only a nuisance. This principle of diminishing utility applies with varying force in the case of different articles and different men. In the case of the silk hat, the utility declines very rapidly as the supply is increased. In the case of shirts the decline will be much less rapid. To the man who has only one shirt it will possess very great utility; he will prize it much more than he would any one shirt if he had twelve in his bureau drawer. It may be said that up to a certain point there is possible an increase in the supply of any commodity in our possession without any appreciable decline in its utility. We want a certain number of suits of clothes and a house with a certain number of rooms. Additional clothing and additional space in our house would be only a burden, something to be cared for but not wanted. Bread, potatoes and beans are nourishing. Potatoes and beans in ordinary times are cheap. If the human race would be satisfied with such food, the population of the earth might be doubled and yet all be well fed; but we demand variety in food and would protest vigorously if the same rations were placed before us day after day. . The law of demand and supply. —Every business man knows that the value or price of any article depends upon the demand for and supply of it. The law of demand and supply may be briefly stated as follows: The price or value of any article tends to vary directly with the demand and inversely with the supply; increasing or declining as the demand increases or declines, but tending to rise as the sup-ply declines and to fall as the supply increases. T he reader must not think of this law as a complete explanation of value. It is not in any sense a theory of value. It merely states in general terms a truth well known to all men familiar with the operations of trade and industry. If we analyze this law we run up against some difficult questions. What is meant by demand? Why does the value rise when the demand increases? Why does the value tend to fall when the supply increases? We find also that there is a curious interaction between value on the one hand and demand and supply on the other. If the price of an article is lowered, we discover that the demand for it tends to increase and that at the same time the supply tends to decrease. We will not undertake to discuss all these problems in this chapter, but will be satisfied with an examination of the terms demand and supply. 4. Analysis of demand. —The desire for a commodity is not in itself an economic demand for it. No matter how much a man may want an automobile, his desire can have no effect upon the prices or value of automobiles unless be has the necessary means of payment. Desire must be accompanied by the necessary purchasing power before it can become economic or effective demand, or have any influence in the market. The second point to notice in connection with demand is that it varies with the price. For example, if the price of automobiles and. the cost of operation could be cut one-half, there would undoubtedly be a great increase in the demand for automobiles and many more cars would, be made and sold. On the other hand, if any conditions cause the prices of automobiles and gasolene to be advanced, the tendency will be toward a weaker demand and smaller sales. Hence when we speak of the demand for any article, manifestly we must always have in mind a certain price, for the demand varies with the price. There is only one way of measuring the demand for an article at any given price, and that is by the quantity of it which is sold at that price. That shows how many people are willing to buy at such a price. Hence it is possible for us to define demand as being the amount of goods which people are willing to take at a given price. 5. Analysis of supply. The word supply as commonly used includes the entire stock of goods within reach of the market, but economists use it in a stricter sense, meaning by it only that portion of the entire stock which is actually offered for sale at a given price. The entire stock of wheat, for example, in a country might be 500,000 bushels and the price $2. If only 100,000 bushels were offered for sale, that would be the economic or effective supply at that price, and if 100,000 bushels were sold at that price, t hat would constitute also the economic demand. Thus in our analysis of demand and supply, we find that at any particular time and price they are measured by the same quantity of goods. This conclusion is not remarkable, for a mans purchasing power depends upon the goods he possesses, plus his credit or borrowing power which in turn depends on his power to produce in the future. How he shall use it is determined by his wants. A farmer going to market with 10 bushels of potatoes, intending to sell them and purchase groceries with the proceeds, is increasing the supply of potatoes in the market and the demand for certain groceries. To the buyers of potatoes his load constitutes an addition to the sup-ply, but to the grocer it represents a demand for certain groceries. Money is merely the medium by which the exchanges are effected; the economic demand for goods is the goods that are in the buyers possession. In modern business the buyer always goes to market equipped with money or credit, and this he has obtained either by the production of goods or by the performance of valuable services. 6. Potential demand and supply. —That part of the stock of an article which is not offered for sale at a given price is sometimes called the potential sup-ply. When would-be buyers of an article are not quite satisfied with the present price and hold back for a lower price, this is referred to as the potential demand. Dealers in any article when determining what price they may hope for naturally take into account,, so far as possible, the intensity of the potential demand and the amount of the potential supply. The great enlargement of cold storage and ware-housing facilities in recent years has made the potential supply of many commodities exceedingly important. The thrifty farmer is no longer compelled to market all his eggs. in the spring and summer, nor all his potatoes and grain crops in the fall. In normal times this withholding of foodstuffs from the market, so that they are not part of the effective supply, tends, first toward the steadying of prices and, second toward the lowering of prices, for the farmer, his profits being larger and more secure, is stimulated to an increase of production. In this book we shall use,the words demand and supply in the sense given them rdinarily by business men, meaning by supply the goods in the market seeking a purchaser, and by demand the quantity of goods which people will buy at or near any given price. 7. The value equation. —Any business man knows that the price or value of an article tends to rise when-ever the demand for it at the existing price is in excess of the supply offered for sale at that price; and conversely that the price of an article is likely to decline whenever the suppl y offered at the existing price is greater than the demand. It is conditions of this sort which account for the zigzagging of prices in the speculative markets. In the worlds great exchanges, where the prices of certain basic commodities are fixed, the traders give consideration to all possible circumstances that may affect the present or future demand or supply of the article in which they are trading. A drought in Argentina may fore-shadow a lessened supply of wheat and cause traders to bid a higher price for it, or storms in Kansas and Nebraska may threaten the corn crop and bring on a rise in the price both of corn and of pork. At any given time there are in any market a number of men more or less anxious to buy a certain commodity and others who wish to sell. If the sellers are asking too high a price, certain buyers hold off and all the stock cannot be sold. On the other hand, if they should offer their goods at too low a price, the demand would exceed the supply, certain buyers would get all they wanted and others would be disappointed.