Principles of Economics (Eco 101) Assignment:

1.Briefly discuss the elementary theory of utility.

Utility theory in economics relates to the value of a certain good, service, or item. It suggests that goods, services, and items can be ranked according to their usefulness.

Utility: means the satisfaction derived from consumption of a particular goods, commodities or services.

With respect to theory, the utility of an item tends to be closely correlated to its price. An item such as gold, which is very useful and thus has great utility (combined with its scarcity), is very expensive. Total utility is closely tied to the bare concept of utility. Total utility points to the aggregate amount of usefulness and fruition there is to be gained from the use of a specific good, service, or other item. 

Furthermore, the abstract measurement of utility is another key concept of the theory. Economists use an abstract measure for the amount of satisfaction you receive from something; it is called a ‘util’. A util is an abstraction because it isn’t something in the physical world like an inch or a pound. It is something inside your head, it represents one unit of satisfaction or happiness. You might get 25 utils of satisfaction from eating a bowl of ice cream while someone else would only get 5 utils of satisfaction.

There are also different types of utility, such as:

• Form Utility – Worth of the good or service based on the combined resources it took to create the good or service

• Time Utility – The utility that is found in offering a good or service to consumers at the right time

• Place Utility – Refers to offering a good or service in the right place for consumers’ easy accessibility

• Possession Utility – The satisfaction a consumer gains from owning a certain product/good.

Utility plays a big role in economics with respect to supply and demand. The law of diminishing marginal utility refers to how the utility gained from a certain good or service decreases as consumption increases. The more sodas you drink the less satisfaction you gain from drinking another soda. This concept naturally affects the demand curve in the following illustrated way:

 The more an individual consumes, the less the need.

Utility functions: expressing utility as a function of the amounts of the various goods consumed, are treated as either cardinal or ordinal, depending on whether they are or are not interpreted as providing more information than simply the rank ordering of preferences among bundles of goods, such as information concerning the strength of preferences.

2.Mention and discuss the different views of utility according to the two schools of thoughts which you have been taught .

Different views of utility according to the Two school of thought 

1. Austrian economics 

2. Marxian economics.

 are: 

• Cardinal utility

• Ordinal utility

Cardinal utility: states that the utilities obtained from consumption can be measured and ranked objectively and are representable by numbers

Ordinal utility: means ranking items under consideration from most satisfaction to the least. Many economists believe that consumers do this in their heads when they make purchase decisions.

3.Explain the demand for and pricing of productive factors emphasizing on the labour market.

Prices are also very important in maintaining productive efficiency. Productive efficiency is defined as producing at a minimum cost. In order to minimize costs, producers must know the prices of the resources. If these resource prices are determined by demand and supply then they will reflect the relative scarcity of the resources and their relative importance (more scarce and important resources will have a higher price) and the economy can achieve productive efficiency.

In a capitalist society prices are determined by the interaction of demand and supply. Since prices are so important, we need to better understand how they are determined. 

Demand

If the price of a product increases what happens to demand for that product? For example, If the price of pizza increases, then the demand for pizza does what? NOTHING! If the price of pizza increases, the demand for pizza does not change. This is because in economics we have a more precise definition of demand. Demand is NOT the quantity that people buy.

Demand is a schedule that shows the various quantities that consumers are willing and able to buy at various prices in a given time period, CETERIS PARIBUS

But we can see what happens to demand if the price of pizzas increases. If the price of pizza increases, say from $6 to $9, nothing changes (demand does not change) because demand already includes various prices and various quantities. Demand does not change when the price changes because demand INCLUDES various prices and various quantities. Demand is NOT how much we buy.

Note: that our definition of demand includes the ceteris paribus assumption. When we develop a demand curve only the price and quantity demanded change. Everything else is assumed to remain constant. I don’t get a large increase in my income. I don’t win the lottery. There isn’t a new study out that states pizzas cause cancer. All other factors remain the same – only the price and quantity demanded change.

Therefore, the more the demand and less the price cost of production. The better the labour market becomes.

When the demand for pizza for example increases the more workers are employed in the labour market.

The lesser the price, that is; from $12 to $8 per a box. The more its demand, the more labour is Employed.