Monday, February 18, 2013

Production Exchange and Consumption Exchange

We began our economic analysis with the examination of the extremely simplified model of an economy of one isolated worker-producer. Here one single exchange act took place. The worker supplied his work to nature against products and nature demanded his work for them. We have since introduced three important features into this simple world: the entrepreneur, money and the time element.
Through their introduction the single-exchange economy is essentially changed. It becomes a two-exchange economy. Here exchange for production and for consumption are separated into two acts. The worker supplies his work no longer to nature for her products, but to the entrepreneur who demands the work against money. In a second exchange, some time later, the entrepreneur supplies the finished product to the worker who demands it against money. Money thereby serves as a sort of general representative of utility. Both the workers and the entrepreneurs value money according to the utility of the goods and services it buys on the market at current prices.
The separation of the production exchange from the consumption exchange does not, however, change the fundamental fact that in a stationary economy production and consumption are always equal. During every production period all factors of production together consume what they produce, or rather what they have produced in the past production period. And during every period the factors of production produce what they consume, or rather what they are going to consume in the subsequent period.

Common Sense Economics

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