3. Utility and prices.

According to our needs and wants we require different kinds of commodities. Our basic needs are simple, but additional individual wants are often complex. Commodities satisfy our wants in different ways. The characteristic of satisfying a want is known in economics as “utility”.

Utility varies between different people and between different nations and also in relation to time. It is also related to the quantity, which is available to the consumer.

The individual cannot change the prices of the commodities he wants. When planning his expenditure, he must accept these fixed prices. He must also pay this same fixed price no matter how many units he buys. With each successive purchase, however, his satisfaction compensates less for the loss of money.

A point in time comes when the financial sacrifice is greater than the satisfaction from purchase. The consumer will therefore stop buying at the current price.

The nature of a commodity remains the same, but its utility changes. The consumer’s desire for a commodity tends to diminish as he buys more units of it. Economists call this tendency the Law of Diminishing Marginal Utility.

The interaction of buyers and sellers determines the price for goods and services. If the price is low, a shortage will develop, driving up the price. If the price is too high, a surplus will develop and move price down. A society may interfere in market prices by means of price controls and ration stamps. Price controls are used in times of severe shortages to make sure that the prices for important items do not go too high, ration stamps were used in 2^nd world war.

In a market economy, prices are the result of the needs of both buyers and sellers. Some price is satisfactory to both buyers and sellers. At that price the supply equals the demand. Since no surplus or shortage exists, there is no pressure on price to change. This point is called an equilibrium price. At the equilibrium price, the amount producers will supply and the amount consumers will buy are the same.

- Commodities of different kinds satisfy our wants in different ways.

- The characteristic of satisfying a want is known in economics as “utility”.

- Utility isn’t equal to usefulness. For example, a submarine may or may not be useful in time of peace, but it satisfies a want.

- Utility varies between different people and between different nations, also in relation to time.

- The utility of a commodity is also related to the quantity, which is available to the consumer.

- The consumer’s desire for a commodity tends to diminish as he buys more units of it. Economists call this tendency the Law of Diminishing Marginal Utility.

- The interaction of buyers and sellers determines the price for goods and services.

- At the equilibrium price, the amount producers will supply and the amount consumers will buy are the same.

3. Income and spending

Income is the money a person receives in exchange for work or property. There are five basic types of income.

Employee compensation is the income earned by working for others. It includes wages and fringe benefits such as health and accident insurance.

Proprietor compensation is the income that self-employed people earn.

Corporation profit is the income corporations have left after paying all the expenses.

Interest is the money received by people and corporations for depositing their money in savings account or lending it to others.

Rent is income from allowing others to use one’s property temporarily.

The total income is the sum of these 5 types of income.

Now people are employees and not self-employed. By the type of work people do workers fall into 4 categories:

1. White-collar workers are people who do jobs in offices, such as secretaries, teachers.

2. Blue-collar workers are people who do jobs in factories or outdoors.

3. Service workers provide services to other individuals or businesses.

4. Farm workers are people who work on their own farms.

In the market system a person’s income is determined by how the market values that person’s resources and skills. Individuals, whose skills society values, receive high incomes. People who own valuable resources, such as capital to invest or land to develop, also receive high incomes.

Income is not the same as wealth. Wealth is any resource that can be used to produce income. Each of it could be sold to produce income. Savings accounts and corporation stocks are types of wealth that usually produce income. In addition, an individual’s debts are subtracted from personal wealth. A person with many valuable possessions but many debts may have no more wealth than a person with a few possessions but no debts.

When individuals receive any income, most of that income is spent. Spending becomes income for someone else. The money each individual spends multiplies through the economy as others receive and spend parts of it. Spending results in changes throughout the economy.

- People’s incomes determine how many of the economy’s goods and services they can purchase. Income is the money a person receives in exchange for work or property.

- The total income is the sum of employee and proprietor compensation, corporation profit, interest and rent.

- One other type of income is a transfer payment.

- By the type of work people do workers fall into one of four broad categories: white and blue collars, service and farm workers.

- In the market system a person’s income is determined by how the market values that person’s resources and skills.

- Income is not the same as wealth. Wealth is any resource that can be used to produce income. People with similar incomes may have very different amounts of wealth.

- When individuals receive any income, most of that income is spent.