[MUD-Dev] Economic model..

Francisco Gutierrez francisc at alumni.caltech.edu
Tue Mar 2 10:09:35 New Zealand Daylight Time 2004

I wanted to add my two cents to the discussion since nobody has
mentioned this yet.  An important built-in control in the real
economy is the fact that most marginal utilities decrease with
quantity.  In other words the derivative of utility with respect to
quantity measured at quantity q should be greater than the same
derivative measured at quantity q+delta (the graph looks a bit like
a log).  In the real world, economic equilibrium comes from the fact
that the demand for something increases as the price drops, and the
supply increases as the price rises, so a competitive market finds
an equilibrium where demand=supply, a monopoly finds an equilibrium
on the point along the demand curve where price*quantity is a
maximum, and most markets are somewhere in between.  The
characteristic curves of the demand and the supply come from the
fact that marginal utilities decrease with quantity.  For example if
I am hungry and dying of hunger, a hamburger might be worth 1000
dollars to me, but the second hamburger will not be worth that much,
and once I am stuffed, I will reach a point where the hamburguer is
worth zero (unless I can store it for later or sell it to somebody
else).  This means that as price goes down my demand increases.
Also, this decreasing marginal utility function means that I will
trade off one good for another, until I maximize the utility of my
investment of labor.  So I will trade my third hamburger for a beer,
etc.  And I will trade my 9th hour of work for leisure.  But if you
offer me more for my 9th hour of work I might decide to work
instead.  This means that as price goes up my supply increases.  If
everybody has the same incentives as me, then the market aggregate
demand and the aggregate supply will have the same shape, and the
market will reach an equilibrium.  This convex utility function
could be implemented by natural resources that are increasingly
harder to harvest (require more time, money, capital, etc), coupled
with biological needs that provide unequal return on their
satisfaction (the hamburger example).

-Francisco Gutierrez
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