No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Three: Demand 65 INTRODUCTION One fond memory I have of when my children were young is hearing one of them say, “I want what I want!” Most of us feel that way, but the candor of a 3-year-old makes our natural, fleshly self-focus very clear. Sometimes we call them “wants,” and other times we call them “needs.” Usually the things we consider to be “needs” are the things that we desire; while the things that others desire we consider to be only “wants” and not nearly as important to satisfy! Economics, however, doesn’t consider the distinction between “wants” and “needs” to be particularly relevant. Even our “needs” have substitutes, so we almost always have a choice. For the very few things that might not have substitutes (such as the air we breathe), there is no choice, and thus no economic calculation. Evaluating our wants or needs requires a new tool in our tool kit: supply and demand analysis. You’ve probably heard, at one time or another, the phrase: “it’s just supply and demand.” This could have been referring to an explanation of some price or economic situation, and from the simple meaning of those words you probably have come to a rudimentary understanding of the phrase. You might think, “if there is more of something, it costs less”—and vice versa. Obviously, we will need to go much more in depth, but the good news is our basic supply and demand analysis is relatively simple; yet, it is a very powerful tool to explain much of what we see around us. We will first consider demand and then we’ll review supply in the next chapter. CONCEPTS FOR DEMAND: A QUICK SUMMARY We’ve already discussed acting man and how he continually assesses his situation, makes causal reasoning between means and ends, imagines satisfaction from action, and makes plans to act. Scarcity is the driving force for action since there is not enough to meet all his demand for goods that are freely available from nature. He must choose between various alternative means to satisfy his desires. The very act of choice suggests an opportunity cost: choosing one thing must entail the setting aside of another possible action towards the next preferred alternative. Our choices are always on the margin ; we consider the additional benefits of a choice against the additional costs. For instance, we never consider choosing between jeans and tennis shoes in an abstract sense. We compare the benefits of a particular pair of jeans against the benefits of a particular pair of tennis shoes (which we’ll have to forgo to purchase the jeans), and our choice will be guided by how much of each we already possess. In economic language, we consider the marginal utility of each alternative in making our choice between two goods. We face true uncertainty, so all action is essentially speculative and can be thought of as entrepreneurial. We don’t know the future, but ex ante (before the event) we imagine on the margin: the incremental (additional) unit which is the focus of our choice decision marginal utility: the incremental (additional) utility (or benefit) to an individual from an additional unit of a good or service “Our choices are always on the margin” ex ante: before the event