The Difference Between Wants vs. Needs in Economics
The field of economics is focused on how the market uses supply and demand to generate a price and influence producer strategy and consumer behavior. In this lesson, we’ll learn how consumers’ wants and needs impact supply and demand.
Wants vs. Needs
Two people could argue for hours about whether a given product or service is a need. Obviously, circumstance and frames of reference are important in this discussion. What one person needs, another person wants. Also, there are a variety of ways to meet a need or a want.
For example, we all need to eat. But does that mean we need to eat a filet mignon with fresh steamed vegetables and a nice glass of white wine? While at first glance it’s easy to assume the difference between wants and needs, when you really start getting into it, the differences can be difficult to articulate.
Wants, Needs and Economics
Quite simply, the economic definition of a need is something needed to survive. In economics, the idea of survival is real, meaning someone would die without their needs being met. This includes things like food, water, and shelter.
A want, in economics, is one step up in the order from needs and is simply something that people desire to have, that they may, or may not, be able to obtain. Again, with those two simple definitions, it doesn’t seem like there should be much to talk about, but there is. Economics deals with how we allocate scarce resources, and those scarce resources may be needed to meet someone people’s needs and other people’s wants. So, we do need to talk about wants and needs.
Imagine a farmer of barley. After his harvest he has two potential customers: one that wants to buy his barley in the hopes to make an import beer and the other that wants to use the barley to make bread. Most people, if answering seriously, could acknowledge that bread is more important in a healthy diet than beer. Who does the farmer sell to? Should the reason someone wants to buy his product matter? Shouldn’t he just sell for the highest price? These are the difficult questions about wants and needs that economics struggles to answer.
The Invisible Hand
Adam Smith, the father of modern-day economics, suggested that most economic issues will be resolved by the invisible hand. The invisible hand is the name of the market forces that are at work as buyers and sellers negotiate prices and seek their own self-interest. Consumers pick their favorite producers by rewarding them with sales while chasing others with poor services or products out of business. The idea of the invisible hand is important in economics – especially in free market systems, but it doesn’t always perform well when it comes to allocating resources associated with a need. It assumes that consumers will pay more for what they need than what they want, but it doesn’t consider people that aren’t able to pay for their needs.
Go back to our barley example, what would the invisible hand have happen? Since the luxury beer would bring in a higher price, the producers of that beer would be more willing to pay a higher price for the barley. So, the invisible hand would claim him the high bidder and award him the barley.
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