The Futility of Utility – How Are Market Prices Set?

The left side of the equation represents the salary of the consumer over a certain period of time or, more generally, the income from all types of activity.
The latter equation is the well-known rule of goods replacement. The minus sign, which many people forget to include, signifies that the consumption of one of the goods is decreasing. Equation represents the production function of both the consumer and the producer. But for producers, the left side of the equation is the product of the price of the issued goods and their amount and the right side is the sum of the values of all production means. The total salary of consumers equals the value of all issued goods, therefore all goods will be sold and purchased.
In my opinion, economists should completely forget about such a concept as over-production. If a goods item is not sold, then it drops out of the market exchange process. This may be linked to the inefficiency of the producer or the producer’s aspirations to increase the price of the goods item in the future. All that is important for us is that the producer has made a loss and reduced the economic growth in the economy under review.
The profit is equal to the increase in the consumer’s income, thanks to which additional goods and services are acquired. It is evident that in stationary conditions, the total profit of all consumers equals zero. Someone may have a profit and someone a loss, but the general consumption will remain unchanged. Therefore, as a rule, profit only occurs in conditions of economic growth. When there is an increase in the production and consumption of only one goods item, the price of which may be considered stable, then The price or the marginal utility of any goods item is equal to the profit obtained from the consumption of the last unit of the goods item. This raises a question – how is it so that a consumer easily agrees with the existing market price for a certain goods item? It is evident that all consumers must evaluate a goods item differently because they receive different profit that depends on the individual, their environment and other circumstances. For example, purchasing a car may bring an owner different profit, it depends on the family status, the distance to the shopping centre, school or office, whether there is public transport and parking areas, the cost of a taxi and much more. However we know the answer to this question from both the theory of producer behaviour and the theory of utility. If the profit from acquiring a goods item is greater than its market price, the consumer continues to additionally consume the item or changes it for another more expensive item that has additional consumer properties. In the end, the consumer price becomes equal to the market price because the profit gained from additional consumption decreases and the market price increases due to additional demand. If the profit from the acquisition of a car exceeds its market price, a family will purchase another car or purchase a more expensive model with more space. Of course, consumers and producers are not ideal machines for calculating profit, they often make mistakes. Consumers make decisions based on their own personal experience and the experience of others; they listen to the opinions of acquaintances, friends, neighbours and any other information. This leaves room for errors that may be repeated in the future.