Understanding Utility, Demand, and Supply in Economics
Understanding Utility, Demand, and Supply
Utility
Utility is the capacity of a commodity or service to satisfy a need.
A good or service is considered useful for someone if that person needs to possess or not possess it.
Types of Income/Utility
- Total Utility (UTX): Represents the sum of satisfaction obtained by a consumer from using a certain amount of goods.
- Average Net Income (UPX): Represents an arithmetic distribution resulting from dividing the total income by the number of satisfiers consumed.
The formula is expressed as:
UPX = UTX / QX
Where:
- UPX: Represents the average utility of an article.
- UTX: Represents the total utility of a certain article.
- QX: Represents the quantity of a certain article.
- Marginal Utility (UMX): Represents the increase in the utility of an item “x” as the consumer uses one more unit of the same satisfier.
The formula for calculation is:
UMX = ΔUTX / ΔQX
Where:
- UMX: Is the marginal utility of a certain article.
- ΔUTX: Represents the increase or addition to the total utility of certain items.
- ΔQX: Represents the increase or addition to the quantity of certain items.
Demand
Demand is the quantity of a commodity that consumers want and can buy at a given price at a specific point in time.
Function of Demand
The demand function for a consumer of a specific good shows the relationship between the quantity demanded of that good and its price.
Determinants of Demand
The behavior of the structure of demand, including variations, modifications, and changes, is influenced by certain elements that substantially alter the action of demand.
The most important determinants are:
- Consumer Income: When consumer income increases, individuals may consume more regardless of the price, so the demand curve shifts to the right. When consumer income decreases, demand is less, so the demand curve shifts to the left.
- Prices of Related Goods: Changes in prices may cause a shift in the demand curve of another good in the same category.
- Consumer Tastes and Preferences: Tastes also undergo changes that may cause a shift in the demand curve. Consumer preferences can be altered simply because tastes are modified over time or through targeted advertising campaigns.
Supply
Supply is the quantity of a commodity or service that enters the market at a given price at a given time. It is how companies decide which and how many goods and services to produce, and what combinations of factors of production to use. We can say that supply is the performance of the producer in the market to price the products.
Role of Supply
This refers to the relationship between the price of an asset and the quantities that an employer would offer. This highlights the Law of Supply, which states that there is a direct relationship between prices and quantities offered.
Determinants of Supply
Consumers are not the only condition for the evolution of the market. Producers also play a role. The market includes a set of interrelationships where vendors respond to the desires of buyers, while buyers also react to the producers.
The most significant determinants that affect supply, besides price, are:
- Price of Productive Factors: If the price of production factors decreases, producers will be interested in producing more, leading to an increase in supply. This implies a shift of the supply curve to the right; otherwise, if production costs increase, supply drops.
- Price of Related Goods: If the price of one good decreases, producers may turn to another good whose price is acceptable to them (based on the production capacity of the company).
- Existing Technology: Improved technology can help reduce production costs and increase yields, which will cause employers to offer more products at any price, and therefore the supply curve will shift to the right. The opposite changes will make the supply curve shift to the left.
- Weather Conditions: These mainly affect agricultural products.