Utility and prices.

Commodities of different kinds satisfy our wants in different ways. For example: food, car, medicine, books satisfy very different wants. This characteristic of satisfying a want is known in economics as “utility”. Utility and usefulness are different things. For example: a submarine may or may not be useful in time of peace, but it satisfy a want. Many nations want submarine. Economists say that utility is “the relationship between a consumer and a commodity”.

Utility varies between different people and different nations. For example: somebody can be a vegetarian and he will be rate the utility of vegetable very highly, while somebody who eats meat can rate the utility of meat very highly. And about nations: mountain-republic like Switzerland has little interest in submarines while maritime nations rate then very highly.

Utility varies is also in relation of time. For example: in wartime the utility of bombs and guns is high. Utility of the commodity is also depend from quantity. If paper is freely available, people will not be so much interested in buying too much of it. If there is an excess of paper, the relative demand for paper will go down.

Let’s speak about prices.

Individual cannot change the prices of the commodities he wants. But theoretical he can do it. For example, if he byes a lot of smth., let’s say a lot of oil, or somebody discover a lot of oil, the price of oil will change on the international market.

Now let’s speak about desire.

The consumer’s desire for a commodity tends to diminish (ди/миниш) as he buys more units of it. Economists call this tendency the Low of Diminishing Marginal Utility.

The interaction of buyers and sellers determines the prices for goods and services. If the price is too low, a shortage will develop and if the price is too high, a surplus will develop.

In a market economy, prices are the result of the needs of both buyers and sellers. The sellers will supply more goods at higher prices. The buyer will buy more goods at lower prices. Some prices is satisfactory to both buyers and sellers. This price is called an equilibrium price.

№4 Supply and demand.

In a market economy, the actions of buyers and sellers set the prices of goods and services. The price, in turn, determine what is produced, how it is produced and who will bay it. Supply, the quantity of a product that suppliers will provide, is the seller’s side of a market transaction. Suppliers usually want the price that allows them to make the most money. Demand, the quantity of a product consumer want, is a buyer’s side of a market transaction. Buyers want the price that gives them the most value for the least cost.

The items are sold one at a time, buyers mast quickly decided what price they are willing to pay. Imagine now that you want to buy electric popcorn maker on the auction. In order to get it you will have to outbid all the others who want it. New popcorn maker costs about $14 and you decided you are willing to go as high as $10 but not hire. At first you look into your wallet. Only $5 is there. But you know that you have $15 on the desk at home, and you know that your friend can lend you some money. And what factors so far have influence you? You decision is the result of your tastes, your available cash income, your wealth, your credit. You have also had to think of the price of substitutes and the price of related items.

And on the auction you buy. The cost of popcorn maker is $9.

The popcorn demand schedule illustrates the low of demand, which indicates that as the price of an item increases, a smaller quantity will be bought.

The degree to which changes in price cause changes in quantity demanded is called elasticity of demand. There are two main kinds of the elasticity of demand, it is highly elastic and inelastic. Highly elastic means that demand changes when the price changes and inelastic means when people buy nearly the same amount even though the price of smth. changes.

There are two main reasons for elasticity of demand. The first concerns the relationship between income and the cost of the product. The second reason why demand is elastic concerns whether or not substitute product is available.

Date: 2016-03-03; view: 842