<blockquote>
<p>The demand curve is a good model to find of utility because it takes marginal utility of the good into account.</p>
</blockquote>
<p>It's actually other way around. Utility is used to find demand curve. You could technically work your way back from demand to utility, but it is utility that determines demand not demand that determines utility.</p>
<blockquote>
<p>However, the supply curve is based on marginal cost of production and marginal revenue of production (price), and we do not know how much a capitalist derives utility from some profit he makes.</p>
</blockquote>
<p>This is incorrect. First, supply curve is not based on marginal revenue. In perfect competition which is form of competition where you have well defined supply curve (you don't have one with monopoly or many other forms of competition) supply curve is just horizontal sum of marginal costs function segments that are above average costs (if we talk about long run and in short run just the horizontal sum of marginal costs). Hence can fully derive supply curve without knowing marginal revenues.  Moreover, producer surplus  <strong>is not</strong> synonymous with total profit in the industry <span class="math-container">$\sum \Pi_i \neq PS$</span>.</p>
<p>The marginal costs are not just monetary costs, they include opportunity cost and consequently they already include any compensation for disutility from working the firm owner gets from supplying the product (e.g. the 'capitalist' might be self employed plumber).</p>
<blockquote>
<p>Therefore, is producer surplus less important (in more consolidated markets), because producers are richer and derive less utility from the money they make?</p>
</blockquote>
<p>No we cannot say that for several reasons:</p>
<p>First, PS is not measure of profit firm gets (especially in short run), so we have no idea if firm even makes any economic profit to begin with. Also, given some PS and CS we have no idea of any income inequality between consumers and producers. PS and CS is not sufficient to determine that.</p>
<p>Second, utility cannot be necessarily compared between individuals. Utility can be ordinal or cardinal. For ordinal utility you can still derive demand curve and consequently CS for all consumers. However, you cannot say that one person with more money  has more utility than a person with less money.</p>
<p>There is also cardinal utility that allows for interpersonal
comparison but cardinal utility is problematic. In real life we do have evidence for ordinal utility but not really for cardinal utility so that is some leap of faith you have to do to use it.</p>
<p>Third, my background is policy economics, so I am personally fine with doing the 'leap of faith' and using cardinal utility. However there are still further issues. PS and CS is a measure of <em>Marshallian</em> welfare (aka total welfare).</p>
<p>Marshallian welfare does not directly measure utility gain or loss. It measures monetary gains. Surplus will capture utility <em>indirectly</em> since the monetary gain for consumer is defined as difference between  willingness to pay and price, and producer surplus as  difference between market price and willingness to supply product to the market. So utility of consumption and disutility of supply is indirectly accounted for and this justifies claiming this is <em>one</em> measure of societal welfare, but PS and CS are not taking into account any inequality between producer and supplier.</p>
<p>There are different measures of societal welfare. For example, Arrow's SW function, Cardinal SW function, Bergson–Samuelson SW function etc.</p>
<p>All have some advantages and disadvantages. The 'vanilla' Marshallian total welfare measure has advantage that it does not require knowing lot of deep parameters, and that it does not require cardinal utility, but disadvantage of that is that without cardinal utility interpersonal utility comparisons are impossible.</p>
<p>However, if you dislike this feature the alternative is not to arbitrary give higher weight to CS. That would be very ad hoc and problematic as you can see from rest of this answer. Rather the solution is to use different measure of welfare, for example cardinal SW function.</p>

CC BY-SA 4.0
2022-11-02T23:04:25.490Z
"it is utility that determines demand not demand that determines utility." ... Not exactly. It's preferences that (together with income and prices) determine demand. Utility is just a vehicle used along this way.
VARulle
CC BY-SA 4.0
2022-11-02T23:29:11.303Z
@VARulle " Not exactly. It's preferences" but utility is a way how to model preferences. U(x=10)>U(x=9) means that person prefers x=10 to x=9
1muflon1
CC BY-SA 4.0
2022-11-02T23:56:54.583Z
Yes, but you don't need to invoke utility at all to get demand from preferences, so saying that demand is determined by utility seems odd to me.
VARulle
CC BY-SA 4.0
2022-11-02T11:13:32.067Z
2022-11-02T11:13:32.067Z
1muflon1
<p>The demand curve is a good model to find of utility because it takes marginal utility of the good into account. However, the supply curve is based on marginal cost of production and marginal revenue of production (price), and we do not know how much a capitalist derives utility from some profit he makes.</p>
<p>Therefore, is producer surplus less important (in more consolidated markets), because producers are richer and derive less utility from the money they make?</p>

<production-function>
Isn't producer surplus less important due to the Marginal Utility of money not being factored in?
user42504
# Isn't producer surplus less important due to the Marginal Utility of money not being factored in?

(Asked by: username_0 on 2022-11-02)

The demand curve is a good model to find of utility because it takes marginal utility of the good into account. However, the supply curve is based on marginal cost of production and marginal revenue of production (price), and we do not know how much a capitalist derives utility from some profit he makes.

Therefore, is producer surplus less important (in more consolidated markets), because producers are richer and derive less utility from the money they make?

**Tags:** production-function

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## 1 answers

### Answer by username_1 on 2022-11-02. Score: 1

> The demand curve is a good model to find of utility because it takes marginal utility of the good into account.

It's actually other way around. Utility is used to find demand curve. You could technically work your way back from demand to utility, but it is utility that determines demand not demand that determines utility.

> However, the supply curve is based on marginal cost of production and marginal revenue of production (price), and we do not know how much a capitalist derives utility from some profit he makes.

This is incorrect. First, supply curve is not based on marginal revenue. In perfect competition which is form of competition where you have well defined supply curve (you don't have one with monopoly or many other forms of competition) supply curve is just horizontal sum of marginal costs function segments that are above average costs (if we talk about long run and in short run just the horizontal sum of marginal costs). Hence can fully derive supply curve without knowing marginal revenues. Moreover, producer surplus **is not** synonymous with total profit in the industry $\sum \Pi\_i \neq PS$.

The marginal costs are not just monetary costs, they include opportunity cost and consequently they already include any compensation for disutility from working the firm owner gets from supplying the product (e.g. the 'capitalist' might be self employed plumber).

> Therefore, is producer surplus less important (in more consolidated markets), because producers are richer and derive less utility from the money they make?

No we cannot say that for several reasons:

First, PS is not measure of profit firm gets (especially in short run), so we have no idea if firm even makes any economic profit to begin with. Also, given some PS and CS we have no idea of any income inequality between consumers and producers. PS and CS is not sufficient to determine that.

Second, utility cannot be necessarily compared between individuals. Utility can be ordinal or cardinal. For ordinal utility you can still derive demand curve and consequently CS for all consumers. However, you cannot say that one person with more money has more utility than a person with less money.

There is also cardinal utility that allows for interpersonal
comparison but cardinal utility is problematic. In real life we do have evidence for ordinal utility but not really for cardinal utility so that is some leap of faith you have to do to use it.

Third, my background is policy economics, so I am personally fine with doing the 'leap of faith' and using cardinal utility. However there are still further issues. PS and CS is a measure of *Marshallian* welfare (aka total welfare).

Marshallian welfare does not directly measure utility gain or loss. It measures monetary gains. Surplus will capture utility *indirectly* since the monetary gain for consumer is defined as difference between willingness to pay and price, and producer surplus as difference between market price and willingness to supply product to the market. So utility of consumption and disutility of supply is indirectly accounted for and this justifies claiming this is *one* measure of societal welfare, but PS and CS are not taking into account any inequality between producer and supplier.

There are different measures of societal welfare. For example, Arrow's SW function, Cardinal SW function, Bergson–Samuelson SW function etc.

All have some advantages and disadvantages. The 'vanilla' Marshallian total welfare measure has advantage that it does not require knowing lot of deep parameters, and that it does not require cardinal utility, but disadvantage of that is that without cardinal utility interpersonal utility comparisons are impossible.

However, if you dislike this feature the alternative is not to arbitrary give higher weight to CS. That would be very ad hoc and problematic as you can see from rest of this answer. Rather the solution is to use different measure of welfare, for example cardinal SW function.

> **Comments:**
> **username_2**: "it is utility that determines demand not demand that determines utility." ... Not exactly. It's preferences that (together with income and prices) determine demand. Utility is just a vehicle used along this way.  
> **username_1**: @VARulle " Not exactly. It's preferences" but utility is a way how to model preferences. U(x=10)>U(x=9) means that person prefers x=10 to x=9  
> **username_2**: Yes, but you don't need to invoke utility at all to get demand from preferences, so saying that demand is determined by utility seems odd to me.  

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