Introduction to Economics
Chapter 2
Wants, Goods and Costs
J. Patrick Gunning
July 28, 2017
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.
Wants
• Definition: the ends that we assume
people have when they make choices
in market interaction.
– Example: the supermarket shopper.
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.
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.
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.
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.
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 children’s clothing and older
people’s wants for memorabilia.
• A businessperson (and student planning for a
future career) can profit by successfully predicting
how wants will change.
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.
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.
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.
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.
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.
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.
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.
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.)
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.
Choices and Marginal Units (3)
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.
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.
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 wantsatisfying 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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?