Choices, choices, choices

            The substitution and income effects are more scientifically observable than the subjective concept of utility. In the substitution effect, people are generally more apt to substitute a lower priced product with another one that stayed around the same price as the one that dropped in price.  This phenomena is not very difficult to imagine. An example of the substitution effect in a common situation is easily described of that with gasoline at two competing gas stations.

Imagine you are traveling on a long trip and only have a certain amount of money to get to your destination. Half way to your destination you see that you are getting low on gasoline. You get off the freeway and see two gas stations. It is $3.00 per gallon for 76 and $2.75 for ARCO.

In your mind, 76 gasoline is a normal brand to the inferior ARCO brand. Given this situation, it is only reasonable that if the cost is the driver for your choice of gasoline, and in most people’s cases it is, then the your choice would be to purchase the gasoline for $2.75.  If however, ARCO was very inferior in your mind that you simply will not buy it, then you will purchase the 76 gasoline anyways and not substitute your purchase for the inferior product.

Another empirical concept that is easily attributable to the reason that people buy more of a product as its price falls is due to the income effect. An example of the income effect is with a college students food budget. It is a well known fact that many college students do not have a lot of money while going to school. In fact, many have to live on ramen noodles and day old pizza just to survive. A college student’s income is very little to start with so if the price of ramen noodles was to drop from $.20 a package to $.10 a package, the difference in real income would be dramatic. At first glance, you might say  “the product has only dropped $.10 in price. How can this be significant?”.

How can this be? Well, in this case, for every package of ramen noodles the student purchased at the time of the surplus, the student has  doubled their allotted food budget for the month. It would be remised for the student to not buy additional packages of noodles and try to pay for next months food, while the price is low. This is because who knows when the price will go back up to $.20. In this light, $.10 does make quite a bit of difference.

   This student may have just gotten lucky with last month’s food budget, but what if the price of ramen noodles jumped up to $.25 a package. Since ramen noodles are already relatively inexpensive, college students will likely still purchase this item, however they are likely to not purchase as many of them. This example illustrates consumer surplus. Let’s say that the maximum amount that people are willing to pay $.30 per package of ramen noodles. As they drop in price, the quantity that they purchase will also increase. Consumer surplus is defined as the difference between the maximum that a consumer is willing to pay minus the price that they actually do pay for the product.

Lets look at this situation from the eyes of the grocery store owner. He gets in ramen noodles at a certain price from his supplier and needs to make a profit as he has a family to feed at home as well as salaries to pay for his employees. He bases the price of his ramen noodles on these considerations as well as the current market price of the product. As he marks up his ramen noodles to a price that will help pay for his overhead, he is making what is known as a producer surplus. A producer surplus is defined as the difference between what the store owner makes on his product minus what they are able to take for it.

            Our preferences may be all unique but they certainly can be categorized by patterns. Different choices are all around us. We all make them constantly, however choices are governed by basic principles that drive our day to day decisions. Choose wisely.

True Human Qualities as Compared to Defeatist Idealists

            The principle of division of labor exists no matter what a markets circumstances happen to be. By this principle, individuals develop different skills and divide work up amongst the  laborers in the area. Plato’s Socrates would likely support the argument that the desire for each member of the community to have their own place in the society is where the concept of justice comes from. To further the two ideas, it might beg the question to wonder, “Does a society need division of labor to exist, as much as it needs justice?”

            The argument that “the united states may still be number one, but I don’t think we will be much longer. The European Union, Japan, all areas of the world are catching up. Soon it will no longer be economical for us to produce anything.”, I agree that it may not be economical, but I disagree that economics are the number only reason that people produce goods . my opinion is that people inherently create a place for themselves in society to make themselves feel a sense of belonging. It is where in creating this sense of belonging that people begin to understand their place in society. This place creates a sense of comfort that many people are not willing to give up, regardless of profit margins or supply curves.

            The principle of comparative advantage, however is not to be overlooked nor is the competitive nature of people throughout the world. There will always be someone who is out to undercut or out produce the “little guy” at every chance they get. How many mom and pop shops have Wal-mart put out of business with this business practice? Don’t get me wrong, I work hard to take business away form my competitors on a daily basis, just like the next business man, but I don’t see the majority of laborers as being quite that ambitious. It is possible that the CEO’s and business owners of the world run the global economy, but it is also possible that it is the grunt worker that gets up every morning and goes to work to do what he is good at that does.

            I have not done extensive research on the subject, but I assume that other countries than America pride themselves in what they are good at as well. Production will not just stop all together because someone else can do it better. The underdog will always be in your way trying his best to outwit even the smartest, most ruthless and cutthroat of adversaries.  This is where the human spirit really comes from. Not statistics and quotas. It will never be worthwhile to import all goods. It would destroy the very heart of the human spirit.