Expectations Attitude

Expectations Attitude

Expectations, the attitude to the future that influences decisions in the present. The consumption and production of commodities requires time. Theft prices and the quantities bought and sold depend not only upon existing preferences and available resources but also upon expectations about future prices. The quantity which people are willing to buy and sell depends upon current prices and what people believe to be their probable tendency. Expectations about the course of prices, therefore, influence economic decisions by individuals, business men and public authorities, and thus the pattern of economic activity.

The development of dynamic methods of economic analysis during the twentieth century, with the emphasis on the interdependence of economic forces through time, has led to the incorporation of expectations into economic theory. The decisions of entrepreneurs to buy and sell take into account current and expected future prices. As the price of a commodity rises, entrepreneurs speculate about its future course. If they think the rise will continue, more of the product will be produced. This decision will affect demand for factors of production Sellers who expect the future price to exceed the current price will 'tend to delay sales. Similarly, sellers who expect the future price to be less than the current price will try to sell as much as possible at the current price.

Expectations are especially important in the liquidity preference theory of the into of interest. The demand for money to satisfy the speculative motive depends fundamentally not upon the current rate of interest but upon expectations of changes in it. If the current rate is 'low' (and the prices of securities are therefore 'high'), as judged by experience, people will expect the prices of securities to fan. They will wish to hold money rather than securities because the cost of holding money is low and they are anxious to avoid capital losses if security prices fall. Similarly, if the rate of interest is considered to be 'high', the prices of securities will be expected to rise and people will prefer to hold securities instead of cash because the cost of holding money is high, and capital gains would be made if security prices rose. Expectations about the future rate of interest thus help to determine the current rate of interest.

Similarly, the current price of a commodity which costs little or nothing to store, i.e. carry through time, will tend to reflect expectations regarding its future price. Where costs of carrying stock are significant, they will complicate the relationship between current (or spot) and expected future prices.

Expectations help to determine current prices, but it is difficult to know what determines expectations. They are presumably governed by experience, but the interpretation of experience varies widely between individuals.

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