Economic theory states that human wants are insatiable, that is, human wants cannot be satisfied with all the resources that are available – no matter how much of goods, services and other resources individuals can acquire, they will still want more. The above statement implies that this theory is wrong – human wants are satiable. This statement is supported by the example that an individual can drink all the coffee he/she wants to at breakfast, there is no limit to the amount of coffee that one can acquire. Hence the wants of an individual are being satisfied – wants are not insatiable.
However, this statement and the attached example cannot be used to support or criticise the economic theory in question. This is because the theory that wants are insatiable holds mainly at the macro level and not at the individual level. Even if we analyse the theory at the micro level, it speaks of the cumulative wants of an individual and not the desire for one particular commodity at one particular point of time. It implies that over a lifetime an individual cannot have all the desired goods and services that he/she wants to have either due to scarcity or affordability. Hence, wants are insatiable. Moreover, at the macro level, the total wants of all the individuals in the world economy as a whole cannot be satisfied because there is scarcity of resources which is why people have to make optimal choices and the theory of opportunity costs arise. (Varian, 2005)
‘Goods and services are scarce because resources are scarce.’
The above statement implies that the amount of goods and services available in the economy is scarce, that is, the amount of goods and services demanded by individuals cannot be entirely supplied. The reason for this scarcity is that resources that are required for the production of goods and services are also scarce.
This statement is not entirely validated. This is because the amount of goods and services available in the economy is not scarce. There may be a temporary shortage of aggregate supply, that is, over some period the total demand for goods and services in the economy may exceed the aggregate supply. However, market adjustments are made instantly such that demand-supply equilibrium is re-established in the next period. Over a lifetime, goods and services are not scarce – they are available in the economy according to the aggregate demand. The scarcity of resources is not reflected in the scarcity of goods and services, that is, it does not result in shortage of output. The problem of resource scarcity is addressed by making optimal economic choices in the production and consumption processes. However, if the entire world economy is considered, the statement is partially true because if resources were not scarce then the production of goods and services would be unlimited. (Varian, 2005)
‘It is the nature of all economic problems that absolute solutions are denied us.’
The main problem that economic theory addresses is that resources are scarce relative to wants and hence economic choices have to be made. All economic issues cannot be solved because it is not feasible to satisfy the requirements of all the individuals in the world. This is what gives rise to the concept of prices – we pay a price for a certain commodity because it is not available in plenty – if it were, we would not pay for it. Hence, whoever needs that particular commodity the most and can afford to pay its price, gets it. If this good were not scarce, everybody would get it for free which is not the case in reality. If all the wants were fulfilled, resources would not be needed in the economy. Hence since nothing comes for free, the satiation of all our wants is impossible. (Mankiw, 2006)
The demand elasticity for physicians’ services is 0.6 – this implies that when the service charge of a physician, that is, the price required to be paid for physician services increases by 1 percent, the demand for physician services falls by 0.6 percent. Thus, demand for physician’ services is price inelastic (<1). This is because this service can be categorized as an essential service or a necessity which is why the proportionate fall in the demand is less than the rise in prices.
The demand elasticity for foreign travel is 4.0 – when the cost or the price of foreign travel increases by 1 percent, the demand for foreign travel falls by 4 percent. Hence the demand for foreign travel is highly price elastic (>1). Foreign travel is a luxury consumption service and hence the demand elasticity is high, that is, the proportionate fall in demand is much more than the rise in price.
The demand elasticity for newspapers is 0.1 – the demand for newspapers will fall by 0.1 percent when the price rises by 1 percent. A newspaper being a necessary commodity, the demand does not reduce much for a unit increase in price. Hence the demand for newspapers is price inelastic (<1) – the demand falls less that proportionately relative to an increase in price.
The demand elasticity for radio and television receivers is 1.2 – for every 1 percent rise in the price of radio and television the demand for the same falls by 1.2 percent. Generally radio and television receivers are considered luxury commodities. Hence the demand is price elastic (>1) – the proportionate fall in the quantity demanded is more than the rise in the price. (Pindyck and Rubinfeld, 2005)
‘Before economic growth, there were too few goods; after growth, there is too little time.’
When economic growth had not taken place, people used to survive at the marginal level, that is, their consumption was limited to the basic need for survival – hence there were too few goods available for consumption. However, over time as economic growth has paced, goods and services are available in plenty – much more than what is required for survival. But this economic growth has brought along with itself a fast-paced existence. Hence, though goods and services are abundant in the present economy, people do not have the time to consume those. There is a trade-off between the time needed to produce more goods and the time needed to consume the goods already available. (Pindyck and Rubinfeld, 2005)
‘It is irrational for an individual to take the time to be completely rational in economic decision making.’
In economic decision-making, if an individual has to be completely rational, he/she has to take into consideration all the factors that related to the particular economic issue. However, this process would obviously be time-consuming. Hence, in order to make a completely rational choice one has to sacrifice time. This gives rise to an opportunity cost because time has economic value – the time he is investing in this rational decision-making could be used elsewhere for a better purpose. So it would be irrational for an individual to sacrifice so much time to make one optimal economic choice. (Mankiw, 2006)
Ariely, D 2008, Predictably Irrational: The Hidden Forces That Shape Our Decisions, Harper Collins, Canada.
Kreps, D 2012, Microeconomic Foundations I: Choice and Competitive Markets, Princeton University Press, USA.
Mankiw, N 2006, Principles of Microeconomics, South Western Educational Publishing, USA.
Parkin, M 2004, Microeconomics, Addison Wesley Publishing Company, USA.
Pindyck, R & Rubinfeld, D 2005, Microeconomics, Pearson Education, USA.
Schiffman, L & Kanuk, L 2003, Consumer Behaviour, Prentice Hall, USA.
Solomon, M 2006, Consumer Behaviour, Prentice Hall, USA.
Varian, R 2005, Intermediate Microeconomics: A Modern Approach, W.W. Norton & Company, USA.