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Contact:
Foundation for Economic Growth,
P.O. Box 10-282,
Wellington, N.Z.
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Professor Thyme Second Lecture
By Phil Scott
Nov 19, 2010, 16:10

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"You will recall", continued the prof, "that value is in the eye of the beholder. The buyer and the seller view the same object from different points of view. The seller wants as much as possible and the buyer won't pay anything more than he has to. So when they finally agree on a price it will be higher than the buyer would like (usually) and lower than the seller would like. Price is a recorded fact. The two valuations somewhat a matter of conjecture."

"The same thing is true in sophisticated business situations as is true in an open air food market. And of course subjective valuations change with time and circumstance. Also when a buyer has bought an item such as an ice-cream for instance he is less likely to buy another one immediately. His valuation of ice-creams goes down as he eats more of them! Most consumer goods are like this. If you have one baby grand piano your desire for a second one is probably nil."

"That is, demand is satisfied."

"Now if we go back to a consideration of the buggy manufacturer we can see that the buggy is made up of a number of items which are themselves manufactured by someone else. The buggy, which is the final consumer item we regard as a first order good and the wheels, frame, leather seats etc as second order goods. These may in turn be made up of third order goods and so on. And of course we could have started with the wheel manufacturer and regarded his range of wheels as first order consumer items and the spokes, metal rims, axle etc as being second order goods."

"So when it comes to the buggy price we would expect that it will be greater than the sum of the prices of the second order goods. After all the buggy manufacturer exists to make a profit otherwise he would be doing something else to feed his family, so he must add his profit onto his costs before he can find a price above which he must sell. So from the point of view of the buggy maker, he will only make a buggy if he can sell it for more than it costs him so the first event in the sequence is the buggy maker determining the market price as best he can. Then he must negotiate with the second order manufacturers to get them to supply his needs at a price he can afford. If he can't - no buggy!"

"So the we see that the selling price of a manufactured good determines the cost price! Somewhat counter-intuitive but only reasonable when we consider that the entrepreneur will only make what he can sell. To do otherwise is death to his business."

"Economics is the study of human action in satisfying human needs. Untold thousands of actions which arise naturally in our attempts to satisfy our own needs by being paid to satisfy others' needs."


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