Lecture # 04

SOME ECONOMIC AND COST CONCEPTS

VALUE AND UTILITY
IN ECONOMICS,

VALUE IS A MEASURE OF THE WORTH THAT A PERSON ASCRIBES TO A GOOD OR SERVICE.

THUS, THE VALUE OF AN OBJECT IS INHERENT NOT IN

THE OBJECT BUT IN THE REGARD THAT A PERSON HAS FOR IT. VALUE SHOULD NOT BE CONFUSED WITH COST OR PRICE OF AN OBJECT. THERE MAY BE LITTLE OR NO RELATION BETWEEN THE VALUE A PERSON ASCRIBES TO AN ARTICLE AND THE COST OF PROVIDING IT, OR THE PRICE THAT IS ASKED FOR IT.
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UTILITY IS A MEASURE OF THE POWER OF A GOOD OR A SERVICE TO SATISFY HUMAN WANTS.

THUS,

THE UTILITY OF AN OBJECT, LIKE ITS VALUE, INHERES NOT

IN THE OBJECT ITSELF BUT IN THE REGARD THAT A PERSON HAS

FOR IT.

UTILITY AND VALUE, IN THE SENSE USED HERE ARE CLOSELY RELATED. THE UTILITY THAT AN OBJECT HAS FOR A PERSON IS THE SATISFACTION HE OR SHE DERIVES FROM IT. VALUE IS AN APPRAISAL OF UTILITY IN TERMS OF A MEDIUM OF EXCHANGE.

CONSUMER AND PRODUCER GOODS

CONSUMER GOODS: ARE THE GOODS AND SERVICES THAT DIRECTLY SATISFY HUMAN WANTS. EXAMPLES ARE COMPUTERS, HOUSES, BOOKS ETC PRODUCER GOODS: ARE THE GOODS AND SERVICES THAT SATISFY THE HUMAN WANTS INDIRECTLY AS PART OF THE PRODUCTION OR CONSTRUCTION PROCESS. EXAMPLES ARE MACHINE TOOLS, BULLDOZERS, SHIPS ETC UTILITY OF CONSUMER GOODS: THE UTILITY OF GOODS AND SERVICES THAT PEOPLE INTEND TO CONSUME PERSONALLY FOR THE SATISFACTION THEY GET OUT OF THEM. THE UTILITY A PERSON ASCRIBES TO GOODS AND SERVICES THAT ARE CONSUMED DIRECTLY IS IN LARGE MEASURE A RESULT OF SUBJECTIVE, NON LOGICAL MENTAL PROCESSES.
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THIS MAY BE INFERRED FROM THE FACT THAT SELLERS OF CONSUMER GOODS APPARENTLY FIND EMOTIONAL APPEALS MORE EFFECTIVE THAN FACTUAL INFORMATION. EARLY AUTOMOBILE ADVERTISING TOOK THE FORM OF OBJECTIVE INFORMATION RELATED TO DESIGN AND PERFORMANCE, BUT MORE RECENT PRACTICE STRESSES SUCH SUBJECTIVE ASPECTS AS BEAUTY, COMFORT, AND PRESTIGE VALUES. UTILITY OF PRODUCER GOODS: THE SECOND KIND OF UTILITY THAT AN OBJECT OR SERVICE MAY HAVE FOR A PERSON IS AS A MEANS TO AN END. PRODUCER GOODS ARE NOT CONSUMED FOR DIRECT SATISFACTION BUT AS A MANS OF PRODUCING CONSUMER GOODS, USUALLY BY FACILITATING ALTERATION OF PHYSICAL ENVIRONMENT. THE UTILITY OF PRODUCER GOODS ARE USUALLY CONSIDERED OBJECTIVELY.
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ECONOMIC ASPECTS OF EXCHANGE

ECONOMY OF EXCHANGE OCCURS EXCHANGED BY TWO OR MORE PEOPLE. WHEN UTILITIES ARE

IN THIS CONNECTION, A UTILITY MEANS ANY THING THAT A PERSON MAY RECEIVE IN AN EXCHANGE THAT HAS ANY VALUE WHATSOEVERFOR EXAMPLE, AN APPLIANCE FOR THE HOME, A PAIR OF SHOES, A MEAL OR A FRIENDLY GESTURE.

MUTUAL BENEFIT IN EXCHANGE

A BUYER WILL PURCHASE AN OBJECT WHEN MONEY IS AVAILABLE AND WHEN HE OR SHE BELIEVES THAT THE GOOD HAS EQUAL OR GREATER UTILITY THAN THE AMOUNT REQUIRED TO PURCHASE IT.

CONVERSELY, A SELLER WILL SELLAN OBJECT HEN HE OR SHE BELIEVES THAT THE AMOUNT OF MONEY TO BE RECEIVED FOR THE OBJECT HAS GREATER UTILITY THAN THE OBJECT.
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ECONOMIC ASPECTS OF EXCHANGE

THUS, AN EXCHANGE WILL NOT BE EFFECTED UNLESS AT THE TIME OF EXCHANGE BOTH PARTIES BELIEVES THAT THEY WILL BENEFIT. ECHANGES ARE MADE WHEN THEY THOUGHT TO RESULT IN MUTUAL BENEFIT. THIS IS POSSIBLE BECAUSE THE OBJECTS OF EXCHANGE ARE NOT VALUED EQUALLY BY THE PARTIES TO THE EXCHANGE. WHAT MAKES IT POSSIBLE FOR EACH PERSON TO GAIN IN AN EXCHANGE OF PRODUCER UTILITIES? THE ANSWER IS THAT THE PARTICIPANTS ARE IN DIFFERENT ECONOMIC ENVIROMENTS. EXAMPLE OF LAWN MOWERS (FOR DETAIL --P19 PARA 6 1&2 OF THUESEN)

ECONOMIC ASPECTS OF EXCHANGE

EACH PARTY IN AN EXCHANGE SHOULD SEEK TO GIVE SOMETHING THAT HAS LITTLE UTILITY FOR HIM BUT THAT ILL HAVE GREAT UTILITY FOR THE RECEIVER. IN THIS MANNER EACH EXCHANGE CAN RESULT IN THE GREATEST GAIN FOR EACH PARTY. WHEN A CAR BECOMES STUCK IN SNOW, ONLY A SLIGHT PUSH MAY BE REQUIRED TO REMOVE / SHIFT IT. THE SLIGHT EFFORT INVOLVED IN THE REMOVAL PUSH MAY HAVE VERY LITTLE UTILITY FOR THE PERSON GIVING IT, SO LITTLE THAT HE EXPECTS NO MORE COMPENSATION THAN A FRIENDLY GESTURE. ON THE OTHER HAND, IT MIGHT HAVE VERY GREAT UTILITY FOR THE PERSON WHOSE CAR WAS REMOVED, SO GREAT THAT HE MAY OFFER A TIP. 7

ECONOMIC ASPECTS OF EXCHANGE

THE AIM OF MUCH SALES AND OTHER RESEARCH IS TO FIND PRODUCTS THAT NOT ONLY WILL HAVE GREAT UTILITY FOR THE BUYER BUT THAT CAN BE SUPPLIED AT LOWER COST---THAT IS, HAVE LOW UTILITY FOR THE SELLER. THE DIFFERENCE BETWEEN THE UTILITY THAT A SPECIFIC GOOD OR SERVICE HAS FOR THE BUYER AND THE UTILITY IT HAS FOR THE SELLER REPRESENTS THE PROFIT OR NET BENEFIT THAT IS AVAILABLE FOR DIVISION BETWEEN BUYER AND SELLER. THIS DIFFERENCE MAY BE CALLED THE RANGE OF MUTUAL BENEFIT IN EXCHANGE.
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ECONOMIC ASPECTS OF EXCHANGE

PERSUASION IN EXCHANGE IT IS NOT UNCOMMON FOR AN EQUIPMENT SALESPERSON TO CALL ON A PROSPECTIVE CUSTOMER, DESCRIBE AND EXPLAIN A PIC OF EQUIPMENT, STATE ITS PRICE, OFFER IT FOR SALE, AND HAVE THE OFFER REJECTED.

THIS IS CONCRETE EVIDENCE THAT THE EQUIPMENT ITEM DOES NOT POSSESS SUFFICIENT UTILITY AT THE MOMENT TO INDUCE THE PROSPECTIVE CUSTOMER TO BUY IT.
Persuade: Win approval or support for
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ECONOMIC ASPECTS OF EXCHANGE

IN SUCH A SITUATION, THE SALES PERSON MAY BE ABLE TO INDUCE THE PROSPECT TO LISTEN TO FURTHUR SALES TALK, DURING WHICH THE PROSPECT MAY DECIDE TO BUY ON THE BASIS OF THE ORIGINAL OFFER. THIS IS CONCRETE EVIDENCE THAT THE MACHINE NOW POSSESSES SUFFICIENT UTILITY TO INDUCE THE PROSPECTIVE CUSTOMER TO BUY. BECAUSE THERE WAS NO CHANGE IN THE EQUIPMENT OR THE PRICE AT WHICH IT WAS OFFERED, THERE MUST HAVE BEEN A CHANGE IN THE CUSTOMERS ATTITUDE OR REGARD FOR IT. 10

ECONOMIC ASPECTS OF EXCHANGE

WHAT BROUGHT ABOUT THE CHANGE? A NUMBER OF REASONS COULD BE ADVANCED. IT IS USUALLY SAID THAT THE SALES PERSON PERSUADED THE CUSTOMER TO BUY. IN OTHER WORDS, THE SALES PERSON INDUCED THE CUSTOMER TO BELIEVE SOMETHING NAMELY, THAT MACHINE HAS SUFFICIENT UTILITY TO JUSTIFY ITS PURCHASE. THERE ARE MANY ASPECTS TO PERSUASION. IT MAY AMOUNT ONLY TO CALLING ATTENTION TO THE AVAILABILITY OF AN ITEM. A PERSON CAN NOT PURCHASE AN ITEM HE DOES NOT KNOW EXISTS. IT IS OBSERVED THAT PERSUASIVE ABILITY IS MUCH IN DEMAND, AND IS USUALLY RICHLY 11 REWARDED.

ECONOMIC ASPECTS OF EXCHANGE

PERSUASION AS IT APPLIES TO THE SALE OF GOODS IS OF ECONOMIC IMPORTANCE TO INDUSTRY. MANUFACTURERS MUST DISPOSE OF THE GOODS THEY PRODUCE. THEY CAN INCRESAE THE SALABILITY OF THEIR PRODUCTS BY BUILDING INTO THEM GREATER CUSTOMER APPEAL IN TERMS OF GREATER USEFULNESS, GREATER DURABILITY, OR GREATER BEAUTY, OR THEY MAY ELECT TO ACCOMPANY THEIR PRODUCTS TO MARKET WITH GREATER PERSUASIVE EFFORT IN THE FORM OF ADVERTISING, AND SALES PROMOTION. EITHER PLAN WILL REQUIRE EXPENDITURE, AND BOTH ARE SUBJECT TO LAW OF DIMINISHING RETURNS. IT IS AN INTERESTING STUDY IN ECONOMY TO DETERMINE WHAT LEVELS OF PERFECTION OF PRODUCT AND SALES EFFORT WILL BE MOST PROFITABLE.

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