# Why do we not stick to utilities in calculating supply and demand?

Common microeconomics models give that MC must equal MR in the optimal position for the consumer, therefore, the marginal utility must equal its price. But this is where a mistake has been made, what actually must be concluded is that the marginal utility of the good is equal to the marginal utility of the money paid. But why do we drop the marginal utility of the money and just say price? It's a very important distinction.

Producer theory is a little simpler, because money is exchanged for productive materials (labor, capital, inputs), which yields product, which is sold for money. In other words, we exchange money for money, so including utility would be pointless. However, couldn't there theoretically be a small opportunity cost of using the products that one produces? If I sell candy around school, I would charge more money if I liked the candy and would like to eat it myself, in addition to the cost of getting the candy myself. Therefore, shouldn't we include other utilities such as the utility of consuming the product oneself, in certain cases where this utility is significant?

We actually do in a theory called general equilibrium.

In general equilibrium, rather than studying the consumer or the firm separately, we have consumers and firms interacting. Firms aren't exactly people, their owners are. Here people (the consumers) own the firms and receive a share of their profits.

In a $$2 \times 2$$ model:

• There are 2 goods: $$x,y$$
• The production factors are the usual ones: $$K,L$$
• There are 2 firms: $$1,2$$; $$1$$ produces $$x$$ and $$2$$ produces $$y$$
• There are 2 consumers $$A,B$$

The consumers have preferences satisfying the usual assumptions. But instead of having a fixed income as usual, their budget constraints are determined by:

• Their initial endowments of production factors $$(K_A,L_A)$$ and $$(K_B,L_B)$$ which get bought by the firms
• The profits the consumers receive by owning the firms (a percentage of their profits according to their shares)

In general equilibrium, an equilibrium is reached when supply $$=$$ demand in all markets (the markets for $$x,y,K,L$$), all firms maximize profits and all consumers maximize utility subject to their budget constraints.

Since the consumers earn shares of the firms' profits, a consumer's budget constraint, and hence optimal utility level is dependent on the firms' profits.

As I said, firms aren't people so firms themselves don't have utility functions, but their owners who are consumers actually do.