utility and value | Theories & Examples | posavski-obzor.info
Scarcity determines the value: the less of the good, the higher its value. Utility determines how much you wish (and can) pay for a good: if it is. No one will want to exchange anything of value for sea water at the sea shore. What is the relationship between economics and scarcity and what are their we need a new kind of economics, a structure than cannot be hijacked by the wealthy. Frequently, economists try to optimize relatively opaque notions of ' utility' or. Explain the relationship among scarcity, value, utility, and wealth. 2. Understand the circular flow of economic activity. Applying Economic Concepts.
Suppose the price of bread is actually three cents, and the consumer, therefore, purchases 30 slices per day. The total value of his purchases to him is the sum of the areas of all such rectangles for each of the 30 slices; i. The amount the consumer pays, however, is less than this area.
7 Terms of Economics and their Concepts – Explained!
His total expenditure is given by the area of rectangle 0CBD—90 cents. The difference between these two areas, the quasi-triangular area DBE, represents how much more the consumer would be willing to spend on the bread over and above the 90 cents he actually pays for it, if he were forced to do so.
It represents the absolute maximum that could be extracted from the consumer for the bread by an unscrupulous merchant who had cornered the market. Since, normally, the consumer only pays quantity 0CBD, the area DBE is a net gain derived by the consumer from the transaction.
Virtually every purchase yields such a surplus to the buyer. Utility measurement and ordinal utility As originally conceived, utility was taken to be a subjective measure of strength of feeling. It was not long before the usefulness of this concept was questioned. It was criticized for its subjectivity and the difficulty if not impossibility of quantifying it. An alternative line of analysis developed that was able to accomplish most of the same purposes but without as many assumptions.
First introduced by the economists F. Allen in Great Britain The idea was that to analyze consumer choice between, say, two bundles of commodities, A and B, given their costs, one need know only that one is preferred to another. This may at first seem a trivial observation, but it is not as simple as it sounds. In the following discussion, it is assumed for simplicity that there are only two commodities in the world.
Figure 2 is a graph in which the axes measure the quantities of two commodities, X and Y. Thus, point A represents a bundle composed of seven units of commodity X and five units of commodity Y. The assumption is made that the consumer prefers to own more of either or both commodities. That means he must prefer bundle C to bundle A, because C lies directly to the right of A and hence contains more of X and no less of Y. Similarly, B must be preferred to A.
But one cannot say, in general, whether A is preferred to D or vice versa, since one offers more of X and the other more of Y. Commodities X and Y see text. The consumer may in fact not care whether he receives A or D—that is, he may be indifferent see Figure 3.
Assuming that there is some continuity in his preferences, there will be a locus connecting A and D, any point on which E or A or D represents bundles of commodities of equal interest to this consumer. If the consumer is indifferent between D and E, the gain and loss just offset one another; hence, they indicate the proportion in which he is willing to exchange the two commodities.
In mathematical terms, FE divided by FD represents the average slope of the indifference curve over arc ED; it is called the marginal rate of substitution between X and Y. Indifference curves see text. Figure 3 also contains other indifference curves, some representing combinations preferred to A curves lying above and to the right of A and some representing combinations to which A is preferred. These are like contour lines on a map, each such line being a locus of combinations that the consumer considers equally desirable.
- Discuss the relationship among scarcity, value, utility, and wealth?
- Utility and value
Conceptually, through every point in the diagram there is an indifference curve. Figure 3, with its family of indifference curves, is called an indifference map. This map obviously does no more than rank the available possibilities; it indicates whether one point is preferred to another but not by how much it is preferred.
It is easy to show that at any point such as E the slope of the indifference curve, roughly FE divided by ED, equals the ratio of the marginal utility of X to the marginal utility of Y for the corresponding quantities.
Relative marginal utilities can be measured in this way because their ratio does not measure subjective quantities—rather, it represents a rate of exchange of two commodities. The marginal utility of X measured in money terms tells one how much of the commodity used as money the consumer is willing to give for more of the commodity X but not what psychic pleasure the consumer gains.
Prices and incomes One other type of information is needed to complete the analysis of consumer choice: In what follows, it will be assumed that the consumer spends all his money on the available commodities savings bonds being among the commodities. If PX and PY are the prices of commodities X and Y, respectively, and M represents the amount of money available for spending, the condition that all of the money is spent yields the equation or, solving for Y in terms of X, 2 This is obviously the equation of a straight line with slope and with y-intercept.
The line, called the budget line, or price line, represents all the combinations of X and Y that the consumer can afford to buy with income M at the given prices. Equilibrium of the consumer Figure 4 combines this price line and the indifference curves, permitting direct analysis of the consumer purchase decision. Any point R on that line represents a combination of X and Y that a given consumer can afford to purchase; however, R is not an optimal choice.
This can be seen by comparing R with S on the same price line. Since S lies on a higher indifference curve than R, the former is the preferred position, and, since S costs no more than R they are on the same price line, so each costs M dollarsS gives the consumer more for his money.
It is at T, however, the point of tangency between the price line and an indifference curve, that the consumer reaches his highest indifference curve; this is, therefore, the optimal point for him, given his pattern of tastes as shown by the shapes of his indifference curves.
Indifference curves and a price line see text. The tangency at the solution point has a significant interpretation. It was noted above that the slope of the indifference curve is the ratio of the marginal utilities of the two commodities. It follows that, at the optimal point T, a dollar of expenditure must offer the same utility whether spent on X or on Y. If this is not so—as at point R in Figure 4, where the consumer gets more for his money by spending a dollar on Y rather than on X—it will pay him to reallocate his expenditures between the two commodities accordingly, moving toward S from R.
Equation 2 indicates that a change in income, M, does not affect the slope of the price line, only its intercept. The locus of these points T1, T2, T3. In that case, X is said to be an inferior good of which the consumer buys less as his income rises.
A Positive and B negative income—consumption curves see text. The diagram can also be used to show what happens as the price of X varies. From equation 2 it can be seen that the Y-intercept is not affected by an increase in the price of X but that the slope of the price line grows. Price—consumption curve see text. Income and substitution effects It is useful to divide the effects of the price change conceptually into two parts. An increase in the price of X obviously affects the relative cost of X and Y.
The effect on purchases of this reduction of purchasing power is called the income effect of the price change. Its effect via the relative price change is called the substitution effect. The division can be carried out graphically as follows: The imaginary price line has the following properties: The rise in price has, in the figure, caused the demand for X to fall from C to A the quantities of X corresponding to tangency points T and U.
It has been possible to divide the total effect, CA, into two parts, the income effect, BA, and the substitution effect, CB.
Discuss the relationship among scarcity, value, utility, and wealth? | Yahoo Answers
This breakdown is important, because a number of interesting and important theorems can be proved about the substitution effect. Two of these theorems will illustrate the point. Income effect and substitution effect see text. It has, therefore, value in the economic sense. Value is not the same thing as price.
When value is expressed in terms of money, it is called price. In pre-historic times, people did not know the use of money. They exchanged goods for other goods. This system is called barter. In those days, the price of a commodity meant the commodity or commodities for which it could be exchanged. In other words, price and value could be used as synonyms. In modern times, however, goods are ordinarily exchanged for money.
Therefore, the price of a commodity today means its money-value, i. It cannot be absolute. It is impossible to speak of the value of a commodity in an absolute manner independently of something else. For example, to say that the value of a fountain pen is great, gives an idea of its utility only. To talk of the value of a fountain pen. In the economic sense, we must relate it to something else which we can get in exchange for it.
What is the relationship among scarcity, value, utility and wealth? | Yahoo Answers
Value is always in terms of something Value equates certain commodities, i. It expresses relationship between the two commodities; it relates one to the other. That is why value is said to be relative. A thing does not stand alone. When we are thinking of its value, we always think of something else also, in terms of which its value can be expressed, whether it is money or any other commodity. Value thus is relative and as such represents an equation between two commodities.
It is very easy to see that both sides of the equation cannot rise at the same time. Take the previous example: If the fountain pen increases in value, it will buy more pencils than before, which means that pencils have gone down in value.
On the other hand, if pencils become more valuable, less than 5 dozen will be needed to buy a fountain pen. This means that the value of the fountain pen has gone down. Thus, if one thing goes up, the other thing comes down in value. The value of both cannot go up or come down at the same time.
Hence there cannot be a general rise or fall in value; But there can be a general rise or fall in prices. We see such a rise in prices now-a-days. The price of everything has gone up at the same time.
But here we are looking at one side of the equation only, the goods side, and not the other, the money side. Goods have gone up in value, while money has come down in value.
Thus all prices have risen, but all values have not risen. Hence we can conclude that there can be a general rise in prices, but there cannot be a general rise in values.
A man of wealth, as ordinarily understood, is a rich man, i. But in Economics every man, even the poorest of the poor, possesses some wealth, as we shall see presently.
But in Economics money is not the only form of wealth; anything which has value is called wealth in Economics. Economic goods are scarce and command a price in the market. If it is a useless thing, e. Nobody will pay anything for nobody would like to have it; and a will not be wealth. It is wealth only if man needs it and uses it.
Therefore, besides being scarce, a commodity must have utility. But it may not be necessarily useful. Even a harmful thing will be regarded as wealth, provided it possesses utility and can satisfy a want. Further, the idea of ownership is also present in wealth. This means that unless an article can be owned and is capable of being transferred from one owner to another, it cannot be regarded as wealth.
Thus, we see that before a thing can be called wealth in economics, it must possess certain attributes or qualities which we discuss below. There are three attributes of wealth, as in the case of value: Utility, Scarcity and Transferability or Marketability.
If you want to find out whether a good is wealth or not, ask yourself these three questions: Can it satisfy a human want?
What is the relationship among scarcity, value, utility and wealth?
Or does it possess utility? If the answer to all these three questions is in the affirmative, it is wealth. A negative answer to any one of these questions will exclude it from the category of wealth. For instance, if a thing possesses utility but is not scarce and vice versa, it is not wealth. It must be both scarce and useful if it is to be called wealth. It must also be transferable.
Applying these tests, we find that money, land, buildings, furniture, machinery, clothes, gold, silver, goodwill of a business, in fact all goods, material and non-material, which are objects of human desire, which are scarce, and which can be bought and sold in the market, are wealth.
Documents of title like bills of exchange, bills of lading, documents of property and insurance policies up to surrender value are also wealth. They are valuable because they represent titles to property. Hence they are sometimes called Representative Wealth.
But free goods like fresh air, water and sunshine are not wealth unless they become scarce as in big cities. Personal qualities like honesty, skill, ability and intelligence too are not wealth. They are a source of wealth but are not wealth in themselves, because they are not transferable. In the same manner, the oceans, the Gulf Stream, the sun, the moon, etc.
Human beings are not wealth, unless they happen to be slaves. As such they are property of their master and can be transferred. Money is wealth as defined above—it possesses utility; it is scarce and it is transferable. All money is, therefore, wealth, but all wealth is not money, as wealth is understood in the ordinary speech. Wealth takes so many forms; it consists of all kinds of property and money is only one kind of wealth.
Income is what the yields.
A man may possess a lot of immovable property. It may be worth Rs. This is his wealth. But how much, does he get from it in a year? Wealth is a fund and income a flow. Wealth and welfare are very closely inter-related. Wealth is the means and welfare the end. Economics studies wealth and not welfare because there is no general agreement on what welfare means.
The idea of welfare varies from individual to individual, from time to tine and from country to country. Wealth, on the other hand, has a definite meaning. Economics makes wealth its subject-matter, because wealth happens to be a convenient measure of human motives. Wealth is not studied for its own sake. Wealth in general promotes welfare. If a man happens to be a rich man, he will be able to live well himself and may also help others.
Wealth thus promotes welfare. We repeat that wealth is the means and welfare the end. Wealth can undoubtedly be used to make people happier and more comfortable. Poverty is a great curse and root of many evils. But wealth promotes mental, moral and physical well-being of the people. It may, however, be pointed out that what is regarded as wealth by economists may not necessarily be good and useful.
It may actually be harmful, e. These are regarded as wealth, but their use does not promote human welfare. Wealth, as understood in Economics, has nothing to do with usefulness. No ethical or moral meaning is attached to it. Further, as has already been mentioned, increase in wealth does not necessarily mean an increase in welfare.
It only means that the number of economic goods, which have become the property of people, has increased, whereas the number of free goods like fresh air and water, which are highly desirable and useful, has decreased. It cannot be claimed that this state of affairs has promoted the welfare of society. Thus, wealth and welfare are not synonymous under all circumstances. But, on the whole, wealth is a powerful means of promoting human welfare.
Wealth can be classified as follows: The wealth of an individual consists of: But we do not include in wealth his personal qualities like skill and intelligence, for they are not saleable. We also deduct the money he has borrowed and has to pay back.
Personal qualities like skill, ability and intelligence are not wealth as explained above. It consists of State and Municipal property, that is, things owned by a society or community in common. Narrowly speaking it consists of the aggregate wealth or all citizens, excluding me debts due to one another. Here we use the term wealth as defined above. In the wider sense, however, national wealth may also include rivers, mountains, a good climate, good government, high character of the people, etc.
They are valuable national assets. Such things cannot be called wealth in the strict economic sense. It is the wealth of the whole world, a sum total of the wealth of all nations.
It includes the wealth of all countries in the strict economic- sense as well as rivers, mountains and all other natural resources which are regarded as wealth in the wider sense. This refers to debts owned by individuals or States. If something is a nuisance, say wild pigs or stray cattle damaging the crops, it may also be regarded as negative wealth. Our sugar factories some time back had to incur a lot of expense in getting molasses removed from their premises; in those circumstances molasses were negative wealth.
Income, Saving and Investment: Wealth refers to property or assets. The amount of money which these assets yield is called income. While wealth is a stock, income is a flow. Distinction may also be made between money income and real income.
While income of a person expressed in terms of money per month or year is his money income, the Real income of a person consists of goods and services that he purchases with his money income. Real income depends on prices. It rises inversely with the price level. Income from the point of view of the economy as a whole, i. It includes income produced both inside the country and that earned by its nationals abroad. A part of the current income is consumed or spent and a part thereof is saved and invested.
The excess of income over consumption is the saving made by the people. Saving may be held in the form of cash or a bank balance or in some investment, i. Investment thus includes additions to inventories as well as to fixed capital.
Investment may be autonomous or induced. Autonomous investment is made by the State for promoting public welfare and induced investment is done by businesses as a result of change in the income level or consumption and also depends on price changes, interest charges, etc.
Equilibrium means a state of balance. When forces acting in opposite direction are exactly equal, the object on which they are acting is said to be in a state of equilibrium. For example, a consumer is said to be in an equilibrium position when he is deriving maximum satisfaction and a producer or a firm is said to be in equilibrium when it is making a maximum profit or incurring a minimum loss.
In both cases, there will be no inducement to change, i. An industry is said to be in equilibrium when all the firms in the industry are making normal profits so that there is no inducement for the new firms to enter or the old firms to leave the industry.
There is no incentive for any more change. There is said to be a stable equilibrium when the object, on which forces are acting, after having been disturbed, tends to resume its original position.
But, when a slight disturbance evokes further disturbance, so that the original position is never restored, it is a case of unstable equilibrium. On the other hand, when the disturbing forces neither bring it back to the original position nor do they drive it further away, it is called neutral equilibrium.
In economic analysis, stable equilibrium is most commonly used Short-term Equilibrium: In the case of short-term equilibrium, economic forces do not get sufficient time to bring about complete adjustment.
For example, supply is adjusted to changes in demand with the existing means of production, for there is no time to increase them or decrease them. However, in the case of long-term equilibrium, there is ample time to change increase or decrease even the means of production or the resources available.
For instance, if demand is increased, the supply will also be increased not only with the existing plant and machinery but also by installing new plants and machinery and there is enough time for that purpose. In this case, sufficient time is allowed for mutual adjustment of the economic forces. A partial or a particular equilibrium relates to a single Relation between Income, Consumption, Saving and Investment.
A producer is in equilibrium when he is able to maximise his aggregate net profit in the conditions in which he is working. A firm is said to be in equilibrium when it has attained the optimum size which is ideal from the point of view of profit and utilisation of resources at its command.
Then there is no tendency for it to expand or contract. Equilibrium of our industry refers to a state of industry when there is no incentive for new firms to enter or the existing firms to leave it. Such an equilibrium is not concerned with a single variable, but with a multiplicity of variables.
Particular equilibrium covers a single organisation in the economic system, whereas in general equilibrium all the organisations work the economy is affected. It is, in short, equilibrium of the entire economy. When there are no maladjustments in the economic system as indicated by depression or unemployment and when each part of the system is adjusted with the other we may say that it is a case of general equilibrium. Let us try to understand them. However, economic statics does not imply absence of movement, rather it denotes a state in which there is a continuous, regular, certain and constant movement without change.
It is a state wherein economic activity goes on regularly and constantly on an even keel. A static state is characterised by the absence of five kinds of change the size of population, the supply of capital, the methods of production, the forms of business organisation and the wants of the people; but all the same the economy continues to work at a steady pace.
According to Hicks, we should call economic statics those parts of economic theory where we do not trouble about dating. Thus, it is a method of dealing with economic phenomena that tries to establish relations between elements of the economic system—prices and quantities of commodities—all of which have the same point of time. In simple words, economic statics presupposes that the manner in which an economic unit changes is the same as it changed in the past and will change in the future.
It suffices, therefore, under economic statics, to study the economy in its present position. Significance or uses of economic statics: Though economic statics is mostly unrealistic and unsuitable for most of the purposes, yet it enjoys the virtue of simplicity. Again, it is only through the method of economic statics that we study how an individual allocates his income on the purchase of various commodities to maximize the satisfaction, how a producer combines his inputs in an optima!
The static analysis suffers from a few serious shortcomings. It takes us far away from the reality. It assumes variable data such as population tastes, resources, and techniques, etc.