Are Firms Taking Advantage of Consumers?

Emily Musso, AM period, Honorbound

According to Naked Economics, consumers try to make themselves as well off as possible and firms try to maximize their profits as much as they can [1]. This being said, who doesn’t want to make themselves as well off as possible by maximizing their utility? It is common sense that Americans love to buy things–many times, things we don’t even need.

Incentives have a big impact on consumers today. With all the new technology that we have, someone is always trying to sell or create something new, specifically firms. In Naked Economics, Wheelan states that “the only way for firms to make profits is by delivering goods that we want to buy”[ibid]. Producers will seemingly produce items to sell to consumers and they will only sell them if they are sure of making a profit. Firms will continue to produce a certain good until the marginal cost–the change in the total cost that occurs when the quantity produced is increased by one unit–equals marginal revenue–the additional revenue that will be generated by increasing product sales by one unit [2].

Sometimes maximizing one’s utility can be found with self-interest and can lead to selfishness. Self-interest is mainly how people create and innovate. If a girl has an issue with brushing her hair, she will want to create a brush to make it easier to do so. In that way, she benefits from it by both solving the problem and by earning money. Other people who also have a hard time brushing their hair will both buy the product and benefit by solving their problem. As a result, many people can benefit from self-interest, but the firm gets the money, therefore taking advantage of their consumers.

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Figure 1 [3]

Opportunity cost is the next best alternative forgone when an economic decision is made. It also applies to production and consumption. If a consumer is debating between buying a pool or a hot tub, and ends up buying a pool, the opportunity cost of the pool would be the hot tub. When a firm is producing a good, they sometimes have to choose whether to produce more hot tubs than pools or more pools than hot tubs. There are many different shifts that can determine which one is produced more. If firms produce more pools, the demand will go down and there will be a surplus of hot tubs. However, since the supply quantity will be high, prices will be low, and consumers will start to buy more of them, eventually eliminating the surplus.

There are many things to take into account when comparing firms and consumers. Firms seem to only want to do what’s best for themselves. Wheelan states that every person wants to maximize their own utility and sometimes that can turn out to be a bad thing. [1] It all comes down to the different factors of each person, their utility, and the opportunity cost decision that a consumer must make.

[1] Charles Wheelan and Burton G. Malkiel, Naked Economics (New York: W.W. Norton & Company, 2012), 20.

[2] Boundless, “Marginal Cost Profit Maximization Strategy” Boundless.com, last modified August 8, 2016, https://www.boundless.com/economics/textbooks/boundless-economics-textbook/competitive-markets-10/production-decisions-in-perfect-competition-67/marginal-cost-profit-maximization-strategy-251-12348/.

[3] Firms and Consumers. Digital image. benefitsPRO. Accessed June 18, 2017. http://www.benefitspro.com/2017/01/18/brokerage-insurance-firms-misleading-consumers-on.

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