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Introduction to Economics Chapter 2 Wants, Goods and Costs J. Patrick Gunning January 16, 2014.

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Presentation on theme: "Introduction to Economics Chapter 2 Wants, Goods and Costs J. Patrick Gunning January 16, 2014."— Presentation transcript:

1 Introduction to Economics Chapter 2 Wants, Goods and Costs J. Patrick Gunning January 16, 2014

2 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.

3 Wants Definition: the ends that we assume people have when they make choices in market interaction. –Example: the supermarket shopper.

4 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.

5 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.

6 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.

7 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.

8 The Goods People Want Change 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.

9 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.

10 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.

11 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.

12 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.

13 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.

14 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.

15 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.

16 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.)

17 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.

18 Choices and Marginal Units (3)

19 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.

20 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.

21 Perishable, Durable and Re-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.

22 Perishable, Durable and Re-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.

23 Perishable, Durable and Re-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.

24 Deterioration and Obsolescence 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.

25 Depreciation and Appreciation 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.

26 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.

27 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.

28 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.

29 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.

30 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.

31 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?

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