Unit 10 Some Economic Laws

Basic human needs are simple, but every individual has additional personal wants which may be very complex. These complex personal wants are satisfied in different ways by different things. A car, a bottle of whisky and a newspaper satisfy very different wants and the whisky is not a close substitute for the car. This special characteristic of satisfying a want is known in economics as its 'utility'. Utility is not the same as usefulness. A submarine, for example, may or may not be useful in peacetime, but it satisfies a want. Many nations want submarines. Economists describe this kind of utility as 'the relationship between a consumer and a commodity'.

Utility varies between different people and between different nations. A vegetarian does not want meat, but may rate bananas very highly. A mountain republic like Switzerland has little interest in submarines, while maritime nations rate them highly. Utility also varies with time. In time of war, the utility of bombs is high and that of pianos is low. Utility is therefore related to our sense of priorities. The utility of a commodity is also related to the quantity available to the consumer. If men buy a large quantity of paper, they will lose interest in buying more paper. The demand for paper will go down. The utility of a commodity consequently decreases as the consumer’s stock increases.

In most economic systems, the prices of the majority of goods and services are fixed. The individual cannot change the prices of the commodities he wants, and when planning his expenditure, he must accept these prices. A consumer will go on buying cigarettes as long as his satisfaction continues and they render utility. If he continues to pay the current price, his satisfaction is greater than his financial sacrifice. With each purchase, however, his satisfaction decreases, although the prices remain the same. If a consumer's supply of money is limited, a point will come when the financial sacrifice is greater than the satisfaction of smoking cigarettes. He will stop buying the commodity. The cigarettes are the same, but their utility has changed. If the prices rose, he would buy fewer; if they fell, he might buy more.

We can see that the nature of a commodity remains the same, but its utility changes. This indicates that a special relationship exists between goods and services on the one hand and a consumer and his money on the other hand. The consumer’s desire for a commodity tends to diminish as he buys more units of that commodity. This tendency is called the Law of Diminishing Marginal Utility.

Utility is of course related to the Laws of Supply and Demand. When economists talk about a Law of Supply, they mean that a rise in prices tends to increase the supply of a commodity, while a fall in prices tends to reduce it. When they talk about a Law of Demand, they mean that a fall in prices tends to increase the demand for a commodity, while a rise in prices tends to decrease the demand. In any economic situation, a consumer will decide to buy a commodity only in terms of its particular utility to him.

If the prices of a particular commodity rise in the economy as a whole, the rise will naturally encourage producers to make more of that commodity. If, on the other hand, prices fall locally or throughout the world, producers will reduce production. Supplies of many commodities can generally be adjusted to suit market conditions. This means that changes in market prices lead to changes in the quantity of a particular commodity made available to consumers. Household goods and furniture are in this category. In such instances, supply is said to be elastic because it can be increased or decreased rapidly to suit market prices.

The principle of elasticity operates in the area of demand as well as in the area of supply. People very seldom have everything they want. They usually have to choose carefully how they will spend their money. When they exercise this choice, they work according to their personal scale of preference, beginning with top-priority essentials like food and housing. Next on their scale come those commodities which provide comfort or convenience of some kind (telephones, insurance etc.) and finally come the non-essentials like holidays and trips to the theatre, which are important parts of life but not comparable with food and shelter. If it is necessary to pay very high prices for the essentials of life, people pay them – even if this means spending all their income. In such cases demand is inelastic. For non-essentials, however, demand is elastic and particularly responsive to changes in price.

Exercise 1. Answer these questions, basing your answers on the text.

1. What noun is used to show that whisky is not a simple replacement for a car? (§ 1)

2. What noun is used to show that nations are not at war? (§ 1)

3. What adverb is used to show that the utility of a commodity decreases because stock increases? (§ 2)

4. What verb is used to show that cigarettes provide utility as long as satisfaction continues? (§ 3)

5. What adjective is used to show that the price of cigarettes is the price ruling now? (§ 3)

6. What verb is used to show that a consumer's desire tends to 'go down' or 'become less' as he buys more of a commodity? (§ 3)

7. What noun is used to show that household goods and furniture belong to a certain type of commodity? (§ 5)

8. What adjective is used to show that food and housing are more important than other commodities? (§ 6)

Exercise 2. Say whether these sentences are true or false, and if they are false say why.

1. Switzerland is a maritime nation, and places a high priority on submarines.

2. lf the current price of cigarettes remains the same, consumers continue to buy more, even when their satisfaction is less than their financial loss.

3. Because a consumer's desire for a commodity tends to diminish as he buys more units of that commodity, economists talk of a Law of Diminishing Utility.

4. Because the supply of furniture and household goods can be adjusted to suit market conditions, we say that their supply is elastic.

5. Because elasticity of demand refers to things high on our scales of preferences, we can say that the demand for essentials like food, shelter is very elastic.

Exercise 3. Combine these pairs of sentences by using 'although'.

EXAMPLE: x = His satisfaction decreases. y = The prices remain the same.

i x although y = His satisfaction decreases, although the prices remain the same

ii although y , x = Although the prices remain the same, his satisfaction decreases.

1. x = The individual cannot change the current price. y = He may want to do so.

2. x = The utility of the cigarettes has changed. y = Their quality is the same.

3. x = He wants to buy that car now. y = He should wait until he has enough money for both the car and other necessary things.

4. x = The work has not been done yet. y = It was planned five years ago.

5. x = The scheme has been started. y = It has not yet received government permission.

Exercise 4. Punctuate the following passage. Provide capital letters, commas, full stops, brackets, colons etc., where applicable.

prices have risen throughout the national economy since 1954 between 1948 and 1953 there was a period of price stability the government decided in 1960 to change the national policy considerably and to introduce certain price controls although controls were not very popular with industrialists the government also tried to reduce demand by limiting increases in wages throughout the economy although limitation on wages was not very popular with the trade unions this limitation of wage increases applied to both the public and private sectors an official commission was created to regulate wages and price increases it was called the national prices and wages board or npwb

Exercise 5. Insert a suitable preposition in each of the blanks in the sentences.

1. He is interested ___ economics.

2. He is not concerned ___ non-essential commodities.

3. The demand ___ bananas will probably increase.

4. The supply ___ cigarettes dos not usually fluctuate.

5. The consumer's need ___ such commodities is well known.

6. There was a change ___ the quantity of material supplied.

7. He paid quite a lot of money ___ that car.

8. He paid the money ___ that man.

9. The American economic system is based ___ capitalistic principles.

10. Most citizens conform ___ the law of the country in which they live.

11. Non-essential commodities like chocolates cannot be compared ___ basic necessities like shelter.

Supplement

1. We call this type of diagram a histogram. This histogram shows the money spent on certain classes of commodity during 1990 in the state of Noland.

The vertical axis shows the value of the purchases per million dollars.

The horizontal axis lists the actual classes of commodity.

Answer the questions which follow.

1. How much actual money was spent on food in Noland in 1990 ?

2. How much was spent on clothing?

3. What is the sum-total of money spent on the three basic necessities?

4. How much was spent on the fourth class of non-perishable consumer goods?

5. How much less was spent on durables than on clothing?

6. How much more was spent on food than on housing?

2. Composition. Write about 400 words on the economist's concept of utility. Use the material in the units.