The Futility of Utility – The Data

The Futility of Utility - The DataThey will continue to search for an acceptable result and will probably find it. On the other hand, as we will see later, we have made the task more difficult because in our example the profits from the acquisition of the first unit of the same product by different consumers vary considerably, which does not happen all too often. Let us continue. The first buyer purchases 1 unit of the first product and 4 units of the second product. Consequently the profit and expenses of the first consumer will be as follows: d(wlil) = 1X10 + 4X5 = 30.
The second buyer, having analysed the possible acquisitions, comes to the conclusion that purchasing 3 units of the first product will give him or her a profit of 30 and purchasing 2 units of the second product will give him or her 10 currency units. The evaluation of the value of the products: = 10, p2 = 5-. The expenses of the second buyer are: d(wz^) = 3 X 10 + 2 X 5 = 40.
Let us suppose that the third consumer has a profit from the acquisition of 2 units of the first product of 20 and from the acquisition of 6 units of the second product a profit of 30. When purchasing such a quantity of a product the consumer’s evaluation of the value of the products is the same as the evaluation of other buyers. However, a third buyer had a wonderful night out yesterday and slept in very late today. Therefore, this buyer will get only 5 units of the second product. The economic capabilities of producers are limited to 11 units of the second product. Consequently the additional expenses will be: d;.v: : = I 1C – 5 5 = -5.
What conclusions should be drawn from this? Some participants of the market exchange are not satisfied with the results obtained. The producers of the second product, after having quickly sold 11 units of their product, are plagued by doubt and strongly suspect that the price for their product was underestimated. The producers of the second product were only able to sell 6 units out of 7. The third consumer did not obtain the expected profit. The growth of consumption and production of goods in our small country was 115 currency units. In the future, competition between producers of the first product should lead to a reduction in price or a decrease in the volume of production. Both this and the other alternative can be analysed. However, so as not to frustrate the reader we will suppose that the existing technologies do not allow the cost of the first product to be reduced. Therefore producers refrain from producing 1 unit of the product. The resources are freed up go to other firms that will attempt to manufacture a certain product at reasonable prices. The producers of the second product, following their suspicions, slightly raise the price of the product or increase production. Let us suppose that new technological capabilities arrive and producers are able to produce 12 units of the product at a price of $5. It is not difficult to establish that during the process of market trading the following result will be obtained:
d(wiZi) = 1 X 10 + 4 X 5 = 30, d(w2^) = 3 X 10 + 2 X 5 = 40,
d(w3i3) = 2X10 + 6X5 = 50.
All consumers have received the maximum possible profit. The growth in GDP has increased to 120. If, after a certain period of time, the technology of production for, let us suppose, the first product becomes more complete and producers are able to offer a greater amount of goods at a lower price, consumers will increase consumption of the first product. They will increase it to such an extent so that their profit or marginal utility is equal to the market price of the product. The result could be something like this:
d(Wi^) = 2X7 + 4X5 = 34, d(w2Z2) = 6X7+2X5 = 5-2,
d(w3i3) = 4X7+6X5 = SB.
The increase in GDP and the increase in consumption have become even greater than in the previous example and have risen to $144. Let us try to create a schematic diagram of the results obtained (fig. 1). The diagram looks very familiar and is reminiscent of the countless diagrams in economic textbooks on the utility theory (the diagram shows an example where the growth in GDP was $120, = $10, p2 = $5)- The lower left corner shows the indifference curves or the fixed income curves for buyers. The budget lines, the gradient of which depends on the prices established for the goods, touch the curves at points A, B and C. At these points consumers and producers have maximum profit. At all other points of the curve the expenses of the consumers will be more than at points A, B and C. The only difference between this diagram and the diagrams in textbooks is the social indifference curve, which Samuelson and others doubted existed (for example: Goodin, 1993). It is displayed in the upper right corner of the diagram. The social indifference curve is, of course, a curve of constant growth in GDP. GDP is the only real measure of social welfare. At point D, all consumers and producers have maximum profit and the economy is approaching the limit of its production capacities (in our case the production of the first item reaches 6 units and the second – 12 units).