Theory Goods Services
Economic Concepts
Economic theory must be based upon actual fact: indeed, it must be essentially an attempt, like all theory, to describe the actual facts in proper sequence, and in true perspective; and if it does not do this it is an imposture. The most common definition of economics focuses on scarcity and choice: the study of the allocation of scarce resources among competing ends. This is the definition most closely associated with mainstream neoclassical economics. This approach uses a methodology based on the atomistic individual, and has been the most receptive to the mathematization of economic analysis. Although neoclassical economics as positive economics prides itself on its objectivity, and on being value free, its values are implicit; the major value is that any activity that is (or could be) part of a market is, per se, superior to non-market activities. (Christine Rider, 1999)
In most societies goods and services are not regarded as desirable in themselves; few people are interested in piling them up endlessly in warehouses, never to be consumed. Usually the purpose of producing goods and services is to satisfy the wants of the individuals who consume them. Goods and services are thus regarded as means to an end, the satisfaction of wants. In relation to the known desires of individuals for such products as better food, clothing, housing, schooling, holidays, hospital care, and entertainment, the existing supplies of resources are woefully inadequate. They are sufficient to produce only a small fraction of the goods and service that people desire. This creates the basic economic problem of scarcity. Most of the problems addressed by economics arise out of this basic fact of life: The production that can be obtained by fully utilizing all of a nation's resources is insufficient to satisfy all the wants of the nation's inhabitants; because resources are scarce, it is necessary to choose among the alternative uses to which they could be put.
Choices are necessary because resources are scarce. Because a country cannot produce everything its citizens would like to consume, there must exist some mechanism to decide what will be done and what left undone; what goods will be produced and what left un-produced; what quantity of each will be produced; and whose wants will be satisfied and who's left unsatisfied. In most societies these choices are influenced by many different people and organizations, such as individual consumers, firms, trade unions, and governments. (K. Alec Chrystal and Richard G. Lipsey, 1997) one of the differences between, the economies of the USA, the UK, India, and Taiwan is the amount of influence that various groups have on these choices.
If you choose to have more of one thing, then, where there is an effective choice, you must have less of something else. Think of a man with a certain income who considers buying beer. We could say that the cost of this extra beer is so many pence per pint. A more revealing way of looking at the cost, however, is in terms of what other consumption he must forgo in order to obtain his beer. Say that this person decides to give up some cinema attendances. If the price of a pint of beer is one-quarter of the price of a cinema seat, then the cost of four more pints of beer is one cinema attendance forgone or, put the other way around, the cost of one more cinema attendance is four pints of beer forgone. Now consider the same problem at the level of a whole society. If the government chooses to build more roads, and finds the required money by building fewer schools, then the cost of the new roads can be expressed as so many schools per mile of road.
The economist's phrase for costs expressed in terms of forgone alternatives is opportunity cost. The concept of opportunity cost emphasizes the problem of choice by measuring the cost of obtaining a quantity of one product in terms of the quantity of other products that could have been obtained instead.
Elasticity can be used to measure responsiveness of any single variable to changes in any other. To distinguish η from other elasticities, the full term price elasticity of demand is used. Since η is by far the most commonly used elasticity, economists often drop the adjective price and refer to it merely as elasticity of demand, or sometimes just elasticity. When more than one kind of elasticity could be involved, however, η should be given its full title.
Because of the negative slope of the demand curve, the price and the quantity will always change in opposite directions. One change will be positive and the other negative, making the measured elasticity of demand negative. This would pose no problem except for two unfortunate habits of users of elasticity measures. First, sometimes the minus sign is dropped and elasticity is reported as a positive number. (K. Alec Chrystal and Richard G. Lipsey, 1997) Second, it is almost universal practice when comparing two elasticities to compare their absolute, not their algebraic, values. For example, if product X has an elasticity of -2 while product Y has an elasticity of -10, economists will say that Y has a greater elasticity than X (in spite of the fact that -10 is less than -2). As long as it is understood that absolute and not algebraic values are being compared, this usage is acceptable.2 After all, the demand curve with the larger absolute elasticity is the one where quantity demanded is more responsive to price changes. For example, an elasticity of -10 indicates greater response of quantity to price than does an elasticity of -2.
The value of price elasticity of demand ranges from zero to minus infinity. It is zero if there is no change in quantity demanded when price changes, i.e. when quantity demanded does not respond to a price change. A demand curve of zero elasticity is said to be perfectly or completely inelastic. As long as there is some response of quantity demanded to a change in price, the absolute value of elasticity will exceed zero. The more the response, the larger the elasticity. Whenever this value is less than one, however, the percentage change in quantity is less than the percentage change in price and demand is said to be inelastic. When elasticity is equal to one, the two percentage changes are equal to each other. This case, which is called unit elasticity, is the boundary between elastic and inelastic demands. (K. Alec Chrystal and Richard G. Lipsey, 1997)
In economics, similar laws have long since been enunciated, and have proved themselves such valuable instruments for the understanding of the daily problems of the workaday world, that they have been woven into the texture of our ordinary speech and thought. But it is now desirable to set them out in order, in the most concise and formal manner possible.
When, at the price ruling demand exceeds supply, the price tends to rise. Conversely when supply exceeds demand the price tends to fall. (Topbookz, 2008)
A rise in price tends, sooner or later, to decrease demand and to increase supply. Conversely a fall in price tends, sooner or later, to increase demand and to decrease supply.
Price tends to the level at which demand is equal to supply.
Start, for instance, by supposing that demand is in excess of supply. Then the price will tend to rise. After the price has risen, the supply will become larger, while the demand will fall away. The excess of demand with which we started will thus clearly be diminished. But if there remains any portion of this excess, the same reactions will continue; the price will rise further, and for the same reason; demand will be further checked and supply further stimulated. (Topbookz, 2008) In other words, these forces must persist until the entire excess of demand over supply is eliminated. If we start by supposing supply to exceed demand, the converse chain of sequences will operate. Now these very simple steps of reasoning illuminate the nature of the normal equilibrium of demand and supply. They reveal that the equilibrium is established and maintained by the agency of changes in price, and they enable us to lay it down as perhaps the most important thing that can be said about the price of anything that it will tend to be such as will equate demand and supply. (Topbookz, 2008)But that is not all that they reveal. They reveal also the extreme dependence of both demand and supply upon price.
References
Christine Rider; Art, Ethics and Economics, Review of Social Economy, Vol. 57, 1999.
Topbookz, Supply and Demand - Hubert D. Henderson, Available at: http://www.topbookz.com/browse/H/Hubert_D._Henderson /Supply_and_Demand/page2/
Hubert D. Henderson; Supply and Demand, Harcourt, Brace, 1922. 184 pgs. Also (Hubert D. Henderson, 1922)
K. Alec Chrystal and Richard G. Lipsey; Economics for Business and Management, Oxford University Press, 1997
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