Part II Chapter 4
Does it ever amaze you how producers somehow know
how much of each good to produce? In a primitive society
there are very few choices, and people make most of what
In our society, on the other hand, there are
hundreds of thousands of goods that consumers can buy.
The manager of my local Pavilions told me that he orders
more than 3,000 different products each week.
are very few times when what you want to buy is not
available and there are very few goods that are left unsold.
Many students seem to believe that producers collect
information from consumers about what they want through
surveys or other market research.
You would probably be
surprised how little of that is done, other than by large
companies when a new good is being introduced.
do businesses know how much to produce?
Remember from the discussion of production possibilities and opportunity cost, that the
society can only produce so much and that for each good it produces it has to give up
So how are those tradeoffs considered in making the choices of what is
Remember, too, that the “optimal outcome” depends on how much benefit
each consumer gets from the various goods.
If you think about how difficult it can be to
get a group of people to decide what they want for dinner, how in the world do we
organize what everyone in the world wants to have to eat, drink, play, drive, etc?
The simple answer to that question is markets, and the way consumer desires are
communicated to markets is through what economists call
In these next two
chapters, we look at how consumers make choices based on the benefit they can get, how
that translates into consumer demand in each market and how that demand is affected by
changes in consumer tastes, incomes and prices.
When we study the supply of goods, we
will see how that communicates costs to consumers.
Finally, when we put supply and
demand together, we will see how the market coordinates consumers determining that
what gets produced is what benefit them most.
But what about the housing bubble or stock market crashes?
situations when markets are misleading or unstable, such as the recent
The model we are building can also explain why sometimes the
communication goes haywire and outcomes are undesirable.
So, let’s start looking at consumer choice.
If you ask a consumer why they are buying
something, they will probably tell you that they need the product or that they think it is
better than another good or that it is a good deal.
However, these are pretty subjective
“Need”, “better’ and “good deal” are all
expressions since they
depend on individuals’ opinions and tastes.
Also, economists observe people’s behavior,