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August 15, 2018 

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AGGLOMERATION ECONOMIES: A reduction in production cost the results when related firms locate near one another. Firms can be related as competitors in the same industry, by using the same inputs, or through providing output to the same demographic group. The fashion industry, for example, experiences agglomeration economies because they can share specialized inputs (photographers, models) that would be too expensive to employ full time. Retail stores have agglomeration economies when located in shopping malls because they have access to a large group of potential customers with lower advertising cost. Agglomeration economies is given as one of the primary reasons for the emergence of urban areas.

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SECOND RULE OF SUBJECTIVITY:

The second of seven basic rules of the economy, stating that market prices are determined by subjective values and the preferences of buyers and resource owners. Contrary to popular opinion, prices and costs are not immutably facts of nature, but are ultimately based on what people are willing to pay or accept.
This rule stems from the fundamental observation that the price of a product depends on two things (1) demand, especially the demand price that buyers are willing to pay and (2) supply, especially the supply price that sellers are willing to accept. Both prices are subjectively determined and are based on values, beliefs, tastes, and preferences.

Demand Price

Subjectivity is easiest to see from the demand side of the market with demand price. The price buyers are willing to pay for a given product is based on the satisfaction it provides. A good that provides more satisfaction (all things equal) entices buyers to offer a higher price. Satisfaction equals demand price.

Consider the example of Roland Nottingham, a retired business executive who is interested in purchasing a handcrafted picnic table for his back patio. Roland plans to spend a great deal of time relaxing at his picnic table on the crisp sunny spring mornings that can only be found in Shady Valley. The anticipated satisfaction means Roland is willing to pay $150 for a table.

In contrast, Pollyanna Pumpernickel, a divorced mother of two who works as an office manager for Dr. Dowrimple T. Bedside, is also in the market for a picnic table. Paula expects to use her table a few times during the summer months when her deadbeat ex-husband stops by for a family barbecue with their two daughters. Based on limited use, Paula is willing to pay only $75 for a table.

The market price of picnic tables in Shady Valley ultimately depends, at least in part, on the price that Roland, Paula, and other potential purchases are willing to pay. If most buyers are like Roland, then the market price is likely to be closer to $150. Paula will find that market price exceeds her anticipated satisfaction and will not make the purchase. If most buyers are like Paula, then the market price is likely to be closer to $75. Roland will find that market price is less than his anticipated satisfaction and will gladly make the purchase.

Supply Price

Subjectivity also exists on the supply side of the market with the supply price. While less obvious, the price sellers are willing to accept for a given product is also based on satisfaction. However, in this case it is based on the satisfaction foregone from goods not consumed, that is, opportunity cost. A good that involves more foregone satisfaction (all things equal) entices sellers to accept a higher price. Foregone satisfaction equals supply price.

The usual presumption is that the supply price is an immutable fact of nature. Such is not the case. The supply price is based on the opportunity cost of production--what producers need to pay labor, capital, land, and entrepreneurship to produce one good over another. Opportunity cost depends on the value of foregone production, in particular the satisfaction that buyers give up when a good is not produced.

Consider the Shady Valley picnic table market once again. Becky Carpenter is a professional woodcrafter, specializing in picnic tables and outdoor furniture. When considering the fabrication of a picnic table, Becky first calculates that needed materials cost $50. She then determines that it takes five hours of her time, which she values at $10 per hour. Lastly, she adds in an extra $25 for profit, wear and tear on her tools, and general overhead. Her asking supply price is thus $125 per table. She is not willing to sell a picnic table for less.

What makes this supply price subjective? Consider the $10 per hour Becky sets for her hourly wage. This is based on the $10 wage that Becky could receive in an alternative job. In a competitive world, this is the wage Becky could be earning installing asphalt shingles or fixing clogged toilets. These other potential employers are willing to pay $10 an hour because Becky adds $10 worth of valuable production each hour. But the value of these foregone products is also determined based on the subjective satisfaction of wants and needs of the buyers.

Because the opportunity cost of the other inputs has a similar interpretation, the conclusion is that supply price is as subjectively derived as is the demand price.

Subjective For All

Combining the subjectivity of demand price and the subjectivity of opportunity cost and supply price, means that prices are not an immutable fact of existence. Instead, all prices depend on the subjective values that the consuming public places on goods. In other words, if people think something is valuable, then it is.

<= SECOND ESTATESEIGNIORAGE =>


Recommended Citation:

SECOND RULE OF SUBJECTIVITY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: August 15, 2018].


Check Out These Related Terms...

     | seven economic rules | first rule of scarcity | third rule of inequality | fourth rule of competition | fifth rule of imperfection | sixth rule of ignorance | seventh rule of complexity |


Or For A Little Background...

     | scarcity | unlimited wants and needs | consumer sovereignty | satisfaction | value |


And For Further Study...

     | three questions of allocation | economic goals | incentive | economic thinking | economic analysis | political views | four estates | opportunity cost | utility | utility analysis | marginal utility and demand | derived demand |


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