Markets Economists study trade, production and consumption decisions, such as those that occur in a traditional marketplace. In Virtual Marketsbuyer and seller are not present and trade via intermediates and electronic information. Microeconomics examines how entities, forming a market structureinteract within a market to create a market system. These entities include private and public players with various classifications, typically operating under scarcity of tradable units and light government regulation.
To economists, rationality means an individual possesses stable preferences that are both complete and transitive. The technical assumption that preference relations are continuous is needed to ensure the existence of a utility function.
Although microeconomic theory can continue without this assumption, it would make comparative statics impossible since there is no guarantee that the resulting utility function would be differentiable.
Microeconomic theory progresses by defining a competitive budget set which is a subset of the consumption set. It is at this point that economists make The technical assumption that preferences are locally non-satiated. Without the assumption of LNS local non-satiation there is no guarantee that a rational individual would maximize utility.
With the necessary tools and assumptions in place the utility maximization problem UMP is developed. The utility maximization problem is the heart of consumer theory.
The utility maximization problem attempts to explain the action axiom by imposing rationality axioms on consumer preferences and then mathematically modeling and analyzing the consequences. The utility maximization problem serves not only as the mathematical foundation of consumer theory but as a metaphysical explanation of it as well.
That is, the utility maximization problem is used by economists to not only explain what or how individuals make choices but why individuals make choices as well.
The utility maximization problem is a constrained optimization problem in which an individual seeks to maximize utility subject to a budget constraint.
Economists use the extreme value theorem to guarantee that a solution to the utility maximization problem exists. That is, since the budget constraint is both bounded and closed, a solution to the utility maximization problem exists. Economists call the solution to the utility maximization problem a Walrasian demand function or correspondence.
The utility maximization problem has so far been developed by taking consumer tastes i. However, an alternative way to develop microeconomic theory is by taking consumer choice as the primitive.
This model of microeconomic theory is referred to as revealed preference theory. The supply and demand model describes how prices vary as a result of a balance between product availability at each price supply and the desires of those with purchasing power at each price demand.
The graph depicts a right-shift in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new market-clearing equilibrium point on the supply curve S.
The theory of supply and demand usually assumes that markets are perfectly competitive. This implies that there are many buyers and sellers in the market and none of them have the capacity to significantly influence prices of goods and services.
In many real-life transactions, the assumption fails because some individual buyers or sellers have the ability to influence prices.
Quite often, a sophisticated analysis is required to understand the demand-supply equation of a good model.
However, the theory works well in situations meeting these assumptions.Welfare economics is a branch of economics that uses microeconomics techniques to evaluate well-being from allocation of productive factors as to desirability and economic efficiency within an economy, often relative to competitive general equilibrium.
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