The Futility of Utility – Irrational Behaviour

There is nothing wrong with this, as Walras would say, there is a continual process of tatonnement (“groping”) on the markets. A rational consumer will not spend more on acquiring an item than the profit they would gain from using it. Nobody can stop an irrational consumer from being irrational, and there is nothing wrong with this, despite the concerns that modern economists have for this problem. Irrationality does not stop an economist from being in a so-called state of equilibrium. If a producer used up production resources, paid the workers for their labour and was not able to sell their goods, the market would react to this with an increase in prices. If a consumer wants to purchase an item that cannot bring him or her adequate profit, the extra demand for the item will cause it to rise in price. Obviously inflation can easily eliminate any consequences as a result of irrational behaviour. Inflation may perhaps represent a kind of payment for irrationality. This may in fact be confirmed by the high levels of inflation we see in countries with underdeveloped market institutes and high administrative barriers where the circumstances force the consumers and the producers to act irrationally. I would like to highlight another very important conclusion. In a stationary economy, it is virtually impossible for a consumer to determine the price of a goods item. As can be seen in equation, there is one equation and many unknown values (prices). How much is a plant or factory worth when their profits are zero, what is the price of a land plot if, in whichever way it is used, we are only able to reimburse our expenses? As follows from equation, only under conditions of economic growth can we easily determine the price or the marginal utility of a goods item. In order to do so we have to evaluate the profit from the acquisition of an additional amount of the goods, provided that the consumption of these goods is consistent.
Let us look at a simple example which will help us to understand how all producers and consumers come to an agreement, how a single market price for a goods item is formed and how it turns out that all goods are produced in the required quantities and are purchased. Let us suppose that there are three buyers active on the market and a few goods producers producing two different products. In fact, we can look at this example with many buyers, producers and goods. But this will only complicate the process and will not change the main outcomes. Let us suppose that the production capacities of the economy allow us to produce 7 units of one product and 11 units of the other (q± = 7, q2 = 11). Based on their costs and interests, producers set the following prices for the goods: pl = $10, = $5 (hereinafter we shall sometimes omit the $ sign). What steps will consumers take in response to this? They will try to consume such quantities of the first and the second product so that the average profit gained from the consumption of one unit of the product is as close as possible to the producer’s price. The first buyer, analysing their capabilities and gains and also taking into account the recommended prices for the products, will come to the conclusion that purchasing one unit of the first product will help him or her to obtain a profit of 10 currency units and purchasing 4 items of the second product will give him or her 20 units of profit.
If the consumer’s own price was higher than the producer’s price, the consumer would continue to acquire additional goods. Since the profit of the last unit of the product, as with the average profit, would steadily decline it would stop at the time when the prices became equal. If the consumer’s price was lower than the producer’s price, the consumer would reduce consumption. Of course, we had to make considerable allowances, allowing the consumer to get the same price as the producers, despite the non-absolute divisibility of the product. In real life this is very difficult to achieve. However, we have to remember that in real life a buyer has the opportunity to slightly increase or reduce the consumption of virtually any product. He or she does this by increasing or reducing the consumption of various alternatives that are more divisible than the main product. For example, after purchasing a car, a person sometimes uses taxis and public transport, after graduating from university a young specialist continues training at the workplace and uses other methods of acquiring additional knowledge. Furthermore, the modern economy offers the buyer a wide range of similar products at different prices and with different consumer properties. Therefore, it is much easier for consumers to achieve an acceptable result than many people think. I do not know how convincing this all sounds, but nothing bad will happen even if some consumers do not achieve the necessary result.