Exchange Value Reflects the Value

Exchange value reflects the value that a good has to others, that is what the good can generate in an exchange. Use value is the value that a good has to the holder -- the utility that can be derived from its usage. Wealth is accumulated when goods have a greater exchange value than use value -- the holder of a good can make an exchange of goods that increases his or her personal wealth by swapping something for a good of a higher exchange value.

Wants and needs are satisfied by acquiring goods with a higher use value than exchange value, the opposite transaction. The economic sphere and the private sphere roughly correspond with exchange value and use value. The exchange value of a good is determined by its value in the economic sphere. The use value of a good is determined by its value in the private sphere. These two spheres value different goods differently, because those values are based on exchange value and use value.

Demand does not change in perfect competition and equilibrium price because there are no gaps in knowledge among buyers and no distinguishing features of the product. This keeps the price at equilibrium. With nothing to distinguish the different sellers, there is no incentive for the sellers to change their output levels -- demand and supply remain constant at the equilibrium point. Firms in the perfect competition scenario are price takers because there is no gap in information between sellers and buyers.

The buyer can easily switch to a competing product, and knows the appropriate price. This forces the sellers to be price takers in order to maintain market share. The demand curve facing a firm in imperfect competition is a downward sloping line. The higher the price, the lower the demand is the norm. The firm is not a price taker in this scenario, because the firm can set prices in line with its expected outputs. The firm essentially exploits imperfect information on the part of the buyers. 3.

An externality is a cost or benefit of a transaction that occurs as the result of that transaction but is not explicitly priced into that transaction. A public good is a good that is not subject to individual purchase decisions -- that is consumers can neither choose individually to consume or not consume that good. Military defense is an example of a public good -- a member of a given society cannot opt out of the military protection benefits that they receive.

Essentially, no market exists for public goods, they are provided to everyone, or nobody at all. Externalities and public goods lead to imperfections because they cannot be adequately priced by market mechanisms. 4. The greater the wages, the more labor is supplied. The assumption is that some workers will withhold their labor if they are not sufficiently compensated -- they have other things that they would do with their time. In the full employment model, the supply of labor is at 100%.

A change in the price of labor will not impact the level of employment, because it cannot. There is no more labor available in the economy. 5. The neoclassical full employment model views savings as a leakage, because it represents financial capital not available for investment; it is not spent. Investment is an injection because money enters the economy that was previous not in the economy. Leakages and investments balance each other when the rate of return on investment compels sufficient investment.

Thus, the interest rate determines the equilibrium point between savings and investment. Both households are more sensitive to changes in the real interest rate. A declining real interest rate will allow households to increase demand as their cost of borrowing decreases. For businesses, the real interest rate is less important because it impacts both the cost of borrowing and the expected rate of return on investment. 6. If there is increased labor supply, the following changes occur to the macroeconomic model for general equilibrium.

This will allow more products to be produced, which but it should also decrease the cost of labor. Thus, the cost of producing goods will be decreased. The cost of capital should decrease in this equation because the returns on investment are lower. This allows greater production for a lower cost. 7. The supply and demand adjustments that bring the economy back to equilibrium do not occur quickly for sticky wages and sticky prices. These are wages and prices that are difficult to change.

For example, wages can be sticky when they are determined by contracts, or when a floor such as a minimum wage is set. Prices are sticky to the extent that consumers are unwilling to accept increases or companies are unwilling to accept declines. The supply and demand adjustments necessary to bring an economy back to equilibrium should occur fairly quickly, but with sticky wages and prices these changes do not occur quickly. Thus, by the time the change occurs, the macroeconomic conditions may have changed again.

As a result, the change in the wages and prices lags other macroeconomic changes, causing macroeconomic fluctuations and keeping the economy in a state of disequilibrium. Bonus a. Technological innovation cannot occur in a.