Choice | Consumer | Economic Goods | Free Goods | Goods | Limited Means | Opportunity Cost | Scarcity | Service | The basic economic problem | The real cost of a decision | Values conflict and compromises | Values influence decisions made | Values people hold | Wants | Why can individuals not have everything they want
Needs are things individuals must have in order to sustain life, such as food, clothes or shelter (warmth) and water.
Wants are those things individuals would like to have but are not necessary in order to survive, e.g., cell phones, TV, cars, overseas travel. Wants are unlimited as most things wear out and have to be replaced or because of greed. As soon as one level of satisfaction is achieved a new and higher level of satisfaction becomes the objective. Most individuals would like to have more or better things than they possess at the moment. For example, a fisherman may want a larger boat with the latest and best equipment available, something better than he currently has.
Usually individuals use their limited means (time, skills, knowledge, income and family) to first satisfy their needs then, if they have means left over, to satisfy their wants.
The central concept or basis of economics is how individuals and society try to satisfy unlimited (infinite or insatiable) wants using scarce (finite or limited) resources. There would be no economic problem if scarcity was eliminated.
Scarcity refers to the condition of limited means relative to individual’s or society’s unlimited wants. The limited means that individuals have include money (income or wealth), skills or knowledge and time. All the world's population faces the problem of limited (finite or scarce) means, that of time, income and skill. Time is limited whether you are poor or wealthy. There are only 24 hours in a day and time spent on one activity can not be spent on another activity. Income (money) is a limited means for all people because money spent on one item can not be used to buy something else at the same time. There is a finite amount of money that people have or earn, meaning that even the rich can not have everything they want. Everyone has skills but no one person is good at everything, therefore the skills that an individual possesses are limited. Therefore, individuals and society can not have everything they want so must choose the option they want the most.
A choice is a decision between alternatives (options) that results from the condition of scarcity (limited means relative to unlimited wants). All individuals rich, poor or well off, firms and governments must make choices because they can not have everything. For example, Frank has to decide whether to go away for the weekend, or to go fishing with his father-in-law or stay at home and paint the front fence.
When a choice (decision) is made between alternatives there will be an opportunity cost. The opportunity cost refers to the next best alternative foregone of a decision, i.e., it is the second ranked alternative only missed out on. For example, if Frank decided to go fishing with his father-in-law and considered the least desirable alternative as painting the front fence, the opportunity cost is the weekend away. The opportunity cost is not the weekend away and painting the front fence because opportunity cost is singular, and so cannot apply to more than one item. The real costs to the country of building a $860 million ring road around a major city are the other goods and services that could have been produced with the same resources.
A producer is any person or organisation that uses resources (natural, human or capital goods) to create goods and services
Consumers are individuals or households (a group of individuals) that consume (use) goods and services produced by producers (firms or businesses).
Goods (commodities) are objects (or items) that have a physical presence. Goods can be subdivided into free goods or economic goods.
Free goods are goods that are plentiful and have no cost, for example, wind and sunshine.
Economic goods are scarce and therefore have a cost. Economic goods can be subdivided into either consumer goods or capital (producer) goods.
Consumer goods are for consumption by individuals or households (a group of individuals) for their own private satisfaction (use), for example, DVDs, designer clothes.
Capital (producer) goods are man-made goods used in the production of other goods and services, for example, tools, machinery. The distinction between consumer goods and capital goods is not in the type of good but rather in the use to which the good is put; for example, a television used by a household is a consumer good but a television used by a firm as a security measure to prevent theft is a capital good.
Services are what someone does for you, such as the work of a mechanic or doctor.
Consumers’ choices (or decisions) will be influenced by the price of a good or service, the quality and features it may or may not have, their limited means (income, time, skill and knowledge), tastes and preferences, and their values. Individuals and households do not earn enough money or have the time to do everything they want, so must choose the cheapest option or the option that they want the most.
Values are key principles or core beliefs, or those things individuals consider most important. Values that individuals may hold include consideration of others, honesty, integrity and fair trading. Fair trading is doing what is right when dealing with others, that is, not cheating or deceiving them; for example, not selling eggs as organic or free range when they are not. Factors that may influence the different values that individuals may hold include religion, culture, gender, upbringing or family, age or experience and peer pressure.
A consumer’s values will affect his or her behaviour, taste, preference and therefore demand for goods and services, for example, Jamie might not eat fish on Fridays because of her strict religious beliefs. When it comes to grocery shopping Ray buys products that are 'recyclable' or 'environmentally friendly', Sam always chooses the cheapest alternative available and Bill always buys the best quality, this shows that consumers bring different values to their shopping. An individual that values keeping fit and healthy is likely to be influenced in their decision-making by this and may therefore purchase a gym membership and clothing items to be used while exercising as a consequence of holding this value. If a person values education they will spend time studying, completing homework or assignments or pay a tutor to improve their understanding so that they can get better results or pass the course they are doing.
A conflict can arise over the values people hold and the choices individuals make. Jacob may consider it important that he is fit and healthy and is likely to want to spend time training at the gym but he also considers it important to be financially secure so will want to spend time at work earning an income. A compromise is where interested parties and stakeholders make concessions or are willing to give up something or do extra in order to resolve a dispute or situation and allow a conflict to be resolved. To resolve this conflict, Jacob could decide to attend the gym early in the morning and then go to work. In this way, he can earn an income for financial security as well as keeping fit and healthy.