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Economic Principles of Substitution and Maximization Essay

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Updated: Sep 9th, 2021

“Some goods are so necessary, there are no substitutes for them. Gasoline is one of such example. No matter what the price people still have to travel to work.”

The gasoline demand is always high because it is one of the products that have no substitutes. Despite the efforts to find a substitute for gasoline, the demand is not decreasing. According to a recent study, about one out of every forty cars in the U.S. can run on a mix of made from corn. However, drivers are not in a hurry to switch to the new fuel. When prices for gasoline increase, consumers are more likely to find alternative ways to travel (airplanes or buses). One of the ways to reduce gasoline consumption is to plan traveling: go on vacation with friends, drive one car, and eliminate unnecessary rides.

The main point is that gasoline price has a direct impact on consumer spending but little influence on the amount of gasoline purchased. For example, if gasoline price increases, consumers will spend less on vacations, electronics, entertainment, while maintaining the same consumption level of gasoline. Gasoline is inelastic good – when the price changes quantity demanded does not. In the long run, increased gasoline prices may lead to the elimination of driving vacations and the purchase of automobiles with better gas mileage. According to economic research, every one-cent increase in gasoline price leads to a decline by one billion dollars in other areas (Perner, http://www.consumerpsychologist.com/gasoline_prices.htm). This happens because of the so-called “Multiplier Effect” – a small increase in the price of one product (gasoline) leads to a big increase in consumption of another product (entertainment). Therefore, inelastic demand, absence of substitutes, and lack of opportunity to change the lifestyle make gasoline consumers dependant on gasoline supply. Insignificant price changes do no lead to changes in consumption.

Anything worth doing is worth doing well

According to Douglas W. Allen, the principle of maximization is the most fundamental idea in the economy (ch. 6, p. 28). All economic models assume that consumers are maximizing and if goods are freely available consumers demand more than is supplied. Greed is the only source of motivation, as believed by economists. Every product is developed to improve consumer’s life and to fulfill desires. Good products increase an individual’s utility: the principle of maximization stands for giving customers as much utility as possible. In most cases, the need for the specific product is artificially increased through marketing efforts. Following the principle of maximization, any product or service worth of doing is worth doing well because the demand for this product or service will be always high. Consumers seek products they need or want. Most of the products sold today belong to the “want” category: consumers do not need these products but they want them because of different factors.

Recalling the creation of TV sets and the first reaction of consumers, it becomes clear how the maximization process works: at the beginning of TV production and selling very few consumers could afford to buy a TV (an attribute of prestige) and they did buy it even though there was no need for it. Thus, consumers were offered a new product they did not need but which increased their utility. Today, TV has shifted to the category of “need” products and it is hardly possible to find a house in the United States without a TV set. The same economic principle can be traced in the markets of cell phones, notebooks, products of prestige, etc. All innovative products are aimed at increasing consumer’s utility. In other words, consumers buy goods and services they do not need because of motivation to increase personal utility. The art of economy is to direct motivation towards specific goods and services.

Works Cited

Allen, Douglas W. Economic Principles: Seven Ideas for Thinking About Almost Anything. 6th ed. McInnes Creek Press. Web.

Joyce, Christopher. “Study Backs Ethanol as Gasoline Substitute.” Web.

Perner, Lars. Gasoline Prices, Consumers, and the Economy. University of Southern California. Web.

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