Economics Theory
Neo classical concept is applied in economics to describe the effects of incomes on prices of goods. Inputs as well as their outputs in the economy play a major role in establishing outputs in the market and thus the supply of the goods is consequently affected. Demand of goods is also affected, and this is explained using the respective curves. The curves for the demand slope to the right because marginal utility which determines the demand will depend on the utilization. Generally the more a consumer uses a product then the marginal utility will consequently reduce. Also there is the effect of the demand of a particular good reducing with increasing price. Similarly, if all factors remain the same then once the consumer’s income increases the demand for the commodity consequently increases. If the consumer’s income goes down the demand for the commodity will also reduce.
This theory is applied by income stressed individuals to maximize utility. Also income stressed firms apply this concept to maximize their production factors. Also when the price increases there the consumer tends to substitute the commodity with other substitute goods which he sees as fairly priced as compared to that commodity. Substitution is a key element in the neo classical theory which has effect on the demand curve in relation to the income of the consumer and the price of the commodity. When the price increases or the income of an individual reduces then the he will opt for a substitute good in preference to that given commodity. An example is that of a consumer who has preference for tea. The individual may opt for coffee in place of tea in case the price of tea has gone up.
Marginal utility is gained when consumption is less and its value is lost through more use of the good. This result’s in returns on consumption diminishing and thus the goods consumed first will have a higher utility than goods consumed later. Curves for the demand are always established by the desire of a consumer to buy some goods at a certain price. This is as far as additional consumption is equal to the opportunity cost determined by the price, which is the price of alternative commodities also known as the substitutes. This is what is usually referred to as the marginal utility.
Though the curve is downward sloping not always is this the case. There are scenarios where the demand is pointing upwards as is the case with Giffen goods and Veblen goods. Giffen goods are defined as goods which are inferior goods which are considered staple while Veblen goods are goods whose preference will increase with increase in price.
One of the assumptions made by this theory is that an individual’s income and prevalence are different. This implies that an individual’s change of income causes a shift in consumption and not a change in his preferred goods. The other assumption is that the preferences of individuals are identical, that is it does not distinguish between the low end and high end income earners. Finally another assumption made is that the proportional consumption does not change with income.
In the example of sweatshirts and pizza an increase in income will consequently lead in an increase in consumption of pizza and use of sweat shirts whereas a decrease in income will lead to a decrease in consumption of pizza as well as use of sweatshirts. Also if the cost of sweatshirts and pizza reduces then the demand for sweatshirts and pizza will rise and vice versa.
In the historical/conceptual distinction of use value versus exchange value, exchange value isn’t expressed in money terms. Rather it represents what other goods equivalent to it. Contrary the use value is the satisfaction gained in consuming a good or the power of a good to satisfy a need. Some goods such as ornamentals have a good exchange value but poor use value as compared to others such as water which a low exchange value but a high use value. Neoclassical economics considers the concept of money sufficient in understanding trading and markets. Exchange values are thus considered the market price of a given good and they do not consider the social aspect in markets.
Private sphere is different from economy in that in private sphere the society and the markets act on their own without interventions from the government and thus the tastes, preferences and demand are not affected by the government and its policies. Economy is purely based on the market forces. Neoclassic theory is different from economy in that economy does not involve the assumptions made in the neoclassic theory and thus all the market forces come into play in determining the demand and supply of goods and services. In neo colonialism underdevelopment is often seen as the result of various governments’ inefficient utilization of their resources and state mechanisms through regulation of prices policies. Neo classic argues that government control slows growth because it encourages graft, inefficiency and does not offer profit incentive for entrepreneurship. This is not so with conceptual/historical economic approach as well as the economy and private sphere concepts.
