“Mono-quality”
refers to a good having only a single quality, therefore higher quality means
more quantity, lower quality means less quantity, quality being equivalent to
quantity. Gold is gold, silver is silver; one tael of gold is one tael of gold,
one tael of silver is one tael of silver (working on pure gold and pure silver
of course). This is different from the diamond example in Chapter V. Diamond has multi-quality, but since the different
“qualities” have all been measured with each having its own price, it becomes
multi-quantity. The transacted price of a diamond is a combined price of
several quantities and several prices. If we say multi-quality but not
multi-quantity, the reason is that the different qualities of certain goods
have not been separately measured and each quality has not been separately
priced. The so-called quality merely refers to the other quantities that have
not been directly priced.
I will
first use a “mono-quality” good to demonstrate a more thorough application of
the law of demand: how to assert test conditions to couple quantity demanded
and quantity transacted. The example I pick is photocopied papers which are
priced by its number. Certainly, photocopying can have several different “qualities”,
though we assume these other qualities either do not exist or are
insignificant.
My example
is professors of some universities can apply for certain research fund. Such
research fund is not endowed to the professor for his own use, but is controlled
by the university. Not only is the fund limited to be used only by that
professor, but also to be used only for research – the professor cannot utilize
the fund to enjoy life with his mistress. Research uses are clearly spelled
out, one of them being photocopying.
Let’s
assume it costs the professor $0.2 to photocopy in the university whether he
pays for it himself or from the research fund controlled by the university. In
the latter case, deduction is made from the fund by the university. Let’s also
assume two options are available to the professor, out of which only one is
allowed. The first one is the university awards him a one-off pay rise of
$100,000 that he can use for photocopying or enjoying life. The second one is
for him to receive a $100,000 research fund for research purposes which he can
use for photocopying but not enjoying life. Under these two asserted
constraints, which option will the professor photocopy more? Photocopying cost
being the same $0.2 per page, will getting a pay rise of $100,000 or a research
fund of $100,000 lead to a greater increase in photocopying quantity? The
answer is of course the option of research fund. The certainty of this answer
is identical to the sure fall of a coin.
To explain
why photocopying will increase more when a professor receives a research fund
than a pay rise, we can have innumerable hypotheses. The hypothesis that I
derive from the law of demand is: for a pay rise which can be used to enjoy
life, $0.1 is worth $0.1; but for a research fund which is restricted for
research purposes, the worth of its $0.1 is definitely less than the pay rise
of $0.1. Supposing $0.1 of the latter is only worth $0.06 of the former, for
the same photocopying cost of $0.2 a page, the cost after a pay rise is $0.2, while
the cost after a research fund is $0.12. The fall in price then triggers more
quantity demanded.
There are
four important points in this example. First, changing from pay rise to
research fund is a change in constraints, as well as a change in test conditions.
As long as we are able to choose the appropriate test conditions, real-world
phenomena can be much more readily explained. Second, with a good choice of
test conditions, logically, the trends of quantity demanded and quantity
transacted would be identical, hence these two can be said to have been
coupled. In the aforementioned example, the increasing or decreasing trends of
intended quantity demanded and factual quantity transacted are the same. Third,
irrespective of what hypothesis you have invented, under my asserted test
conditions, my hypothesis will be confirmed while yours may be falsified. If
yours is refuted, under the same test conditions with one right and the other
one wrong, this test then becomes a critical test. Obviously, this can only be
achieved when test conditions are smartly chosen. Fourth, the so-called change
or non-change of other things can be ignored in the above hypothesis. As long
as test conditions are smartly chosen, turning their changes into significant
marginal changes, other things become irrelevant.
No comments:
Post a Comment