People can be unwilling to spend, even at very low interest rates {liquidity trap}, because they expect future to be worse and want to save or because they do not perceive need. Making more money causes more spending. Expected inflation causes more spending. More exports can cause more spending.
In some economic situations, one person can gain by taking risk, but another person or business pays for losses {moral hazard}. First person loses little if enterprise fails. Second entity can gain little if enterprise succeeds. Statistically, houses with fire insurance for original house value are more likely to have fires if house value goes down. Statistically, unregulated financial institutions with government insurance for investor money are more likely to issue risky financial instruments.
To prevent moral hazard, second entity must require first person to risk his or her money. For houses, house down payment must be large enough to deter owner from risking loss. For financial institutions, leverage must not be too great, and managers must adhere to principles. Second entity must require that loaned money go only to stated purpose, not to risky investments.
People can spend money sparingly {parsimony}.
People and businesses can buy at lower price and hope to sell at higher price {speculation}|. Speculation typically happens in rising markets and can make economic cycles worse. If economy has contracted and prices are lower, buying can help consumption rate and reduce price fluctuation. If economy has expanded and prices are higher, selling can help consumption rate and reduce price fluctuation.
After investing time or money, people do not change investments {sunk-cost fallacy}. They do not calculate probabilities from current state onward, because they believe they should not waste their investment.
Job satisfaction, job training, job location, status, new ideas, economic cycles, war, peace, world conditions, weather, and strikes can change preferences {economic preferences}. People can choose to have more income or more leisure. People can choose to have more income by working at two or more jobs at once or by getting more education or training.
People have desire for owning goods or services, at given time under given income, and they have relative desires between goods or services {preference curve}|.
let buyer beware {caveat emptor}|.
let seller beware {caveat venditor}|.
Goods and services have uses {utility, economics}|. Economic decisions are about whether to buy or produce one more good or service {marginal principle, decision}. Total consumption or production results from decisions.
marginal utility
Purchase of one more good or service has value related to use {marginal utility, purchase}. Marginal utility decreases as quantity increases {diminishing marginal utility law, quantity}. Last item has lower value than first item, if item price, consumer preferences, consumer income, and other item prices remain the same.
price
Good or service price is marginal value for current consumer.
preferences
For any good or service pair, one combination gives optimum satisfaction, and many combinations give equal satisfaction.
consumption and saving
People have consumption uses {utility of consumption} {consumption utility} and saving uses {utility of saving} {saving utility}. Consumption has value related to use {marginal utility of consumption}, and saving has marginal utility {marginal utility of saving}. Total consumption utility is sum of personal and business consumption utilities. Maximum total consumption utility results when all goods and services have same marginal utility divided by price, because buying another item can gain no more utility.
To maximize total utility, marginal consumption utility equals marginal saving utility, because switching consumption and saving can gain no more utility. Therefore, savings rise as income rises. Leisure marginal utility equals labor marginal utility, because trading work and leisure can gain no more utility.
For serial good or service purchases, the last good or service purchased has a value {margin}| {marginal utility}. Last item has lower value than first item.
Economic decisions are whether to buy or produce one more good or service {marginal principle, psychology}|, not about total consumption or production.
Good or service market price is typically below good or service marginal value to most consumers {consumers' surplus}.
Marginal utility decreases as quantity increases {diminishing marginal utility law, psychology} {law of diminishing marginal utility} {diminishing returns law}| {law of diminishing returns} {decreasing returns law} {law of decreasing returns}. Last item has lower value than first item.
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Date Modified: 2022.0225