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Economics Assumptions about the Maximization of Utility

Economics Assumptions about the Maximization of Utility
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  • 0:02 Utility for Producers
  • 0:44 Why Producers Care…
  • 2:37 Impact if Utility Is Ignored
  • 4:28 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

What can we assume about producers wanting to maximize utility? For starters, we must assume that they want to maximize utility! This lesson explains why that is so important and how producers do it.

Utility for Producers

Let's say that you own a company that produces ink pens. For the sake of simplicity, let's say that you had to purchase three parts from your suppliers - the point, the body, and the ink tube. Your company transforms these raw materials, as well as such factors of production like labor, electricity, and the factory, into the type of pens that you can use in a class to take notes. As a producer, you are obviously a consumer on the resource market, which means that you do have to maximize your utility as a consumer. Remember that utility is a measure of usefulness of something. But what about the perspective of being a producer? Why should you care about utility?

Why Producers Care About Utility

As a producer, you go out of business if your customers don't purchase your goods. I know that probably doesn't sound like a shock, but it really is that simple and it needs to be said. Also, it's to your best advantage that as many consumers as possible purchase your goods - after all, if you're running an efficient business, more customers means more profits. But how do you run an efficient business? In short, it's having an eye for utility.

Utility takes on a bit more complicated view when it comes to producers, but not by much. In short, you should always be working to maximize your profits. In some cases, that means a producer must be a smart consumer of raw materials and other resources. If the average going wage for a worker is $20 an hour, then you should have a pretty good reason to pay your workers $40 an hour. Note that I didn't say that you shouldn't do it. If the average worker just has to pull a lever at your competitor's factory to produce 300 pens an hour, while a worker at your factory must do significantly more to produce a thousand pens an hour, then you should definitely be paying your workers more. After all, you're maximizing your utility for the item produced, not for the item consumed.

Additionally, you must maximize your efficiency in how you provide the goods to the consumer. Say you were going to sell 10,000 pens. All of your transportation costs are equal, whether you send all the pens to one store or to 100 different stores. To maximize the utility of your transportation, assuming that all those stores have about the same level of popularity, you should send your pens to multiple stores. By doing so, you maximize your utility by making sure your pens are put in front of as many people as possible.

Impact if Utility Is Ignored

But what happens if a firm chooses to ignore utility altogether? From the perspective of the producer as a consumer of raw materials, the result could be pretty hilarious if it doesn't cause the destruction of your company. Spending money on the wrong resources is a major way that firms often ignore utility. Having thousands of ink tubes but no pen points in your factory means that your firm can produce no pens.

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