Thursday, February 7, 2013

Differences in Utility Judgment

We have so far been analyzing the behavior of a single producer or Robinson Crusoe. However, an economy does not consist of a single producer but of innumerable producers. If all made the same value judgments and produced goods at the same costs—meaning, in our simplified model, that each producer would be devoting the same number of hours of work to the production of the same goods as every other producer—then the output of all producers would have the same composition. The whole economy would be no more than the sum of all the similar, even if separate, activities of its members. No new problem would arise. But men do not all have the same tastes, nor do they all produce the same goods with the same expenditure of work-hours.
Let us, therefore, turn to an examination of an economy with more than one single producer-consumer. For simplicity's sake we assume that there are two, A and B. Our single producer valued pears in terms of apples in the manner shown in Figure 2. Suppose that the value, in terms of apples, which A attaches to pears is less than our single producer's. Producer B, on the other hand, attaches greater value to pears in terms of apples than did our single producer. This situation is pictured in Figure 3. The curve Da (A's demand for pears in terms of apples) now runs to the left of curve D, the demand curve of our single producer. The demand curve Db of producer B runs to the right of the former demand curve D.
We can now immediately see how many apples and pears A and B produce, if we assume that the production costs of apples and pears are the same (supply curve S1), and if we also assume that the original work-rest choice remains valid, i.e. that each works the number of work-hours that is required for the production of 50 apples. A then produces and consumes 15 pears and 35 apples, while B produces and consumes 25 pears and 25 apples. Our single producer produced and consumed 20 pears and 30 apples. A now concentrates more on the production of apples, B more on the production of pears. Even though the production costs of pears, in terms of apples, are the same for both, differences in taste have resulted in a different proportion of pears to apples in each of the two producers' total output.

Common Sense Economics

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