Discontinuity
A lexicographic preference relation is not a continuous relation. This is because, for a decreasing convergent sequence we have , while the limit (0,0) is smaller than (0,1).
In economics, lexicographic preferences or lexicographic orderings describe comparative preferences where an agent prefers any amount of one good (X) to any amount of another (Y). Specifically, if offered several bundles of goods, the agent will choose the bundle that offers the most X, no matter how much Y there is. Only when there is a tie between bundles with regard to the number of units of X will the agent start comparing the number of units of Y across bundles. Lexicographic preferences extend utility theory analogously to the way that nonstandard infinitesimals extend the real numbers. With lexicographic preferences, the utility of certain goods is infinitesimal in comparison to others.
Lexicography refers to the compilation of dictionaries, and is meant to invoke the fact that a dictionary is organized alphabetically: with infinite attention to the first letter of each word, and only in the event of ties with attention to the second letter of each word, etc.
As an example, if for a given bundle (X;Y;Z) an agent orders his preferences according to the rule X>>Y>>Z, then the bundles {(5;3;3), (5;1;6), (3,5,3)} would be ordered, from most to least preferred:
A lexicographic preference relation is not a continuous relation. This is because, for a decreasing convergent sequence we have , while the limit (0,0) is smaller than (0,1).
A distinctive feature of such lexicographic preferences is that a multivariate real domain of an agent's preferences does not map into a real-valued range. That is, there is no real-valued representation of a preference relation by a utility function, whether continuous or not. [1] Lexicographic preferences are the classical example of rational preferences that are not representable by a utility function.
Proof: suppose by contradiction that there exists a utility function U representing lexicographic preferences, e.g. over two goods. Then U(x,1)>U(x,0) must hold, so the intervals [U(x,0),U(x,1)] must have a non-zero width. Moreover, since U(x,1)<U(z,1) whenever x<z, these intervals must be disjoint for all x. This is not possible for an uncountable set of x-values.
If there are a finite number of goods, and amounts can only be rational numbers, utility functions do exist, simply by taking 1/N to be the size of the infinitesimal, where N is sufficiently large, to approximate nonstandard numbers.
In terms of real valued utility, one would say that the utility of Y and Z is infinitesimal compared with X, and the utility of Z is infinitesimal compared to Y. Thus, lexicographic preferences can be represented by utility functions returning nonstandard real numbers.
If all agents have the same lexicographic preferences, then general equilibrium cannot exist because agents won't sell to each other[ clarification needed ] (as long as price of the less preferred is more than zero). But if the price of the less wanted is zero, then all agents want an infinite amount of the good. Equilibrium cannot be attained with standard prices. The utilities are infinitesimal, but the prices are not. Allowing infinitesimal prices resolves this.
Lexicographic preferences can still exist with general equilibrium. For example,
The nonstandard (infinitesimal) equilibrium prices for exchange can be determined for lexicographic order using standard equilibrium methods, except using nonstandard reals as the range of both utilities and prices. All the theorems regarding existence of prices and equilibria extend to the case of nonstandard utilities, since the nonstandard reals form a conservative extension, meaning that any theorem which is true for reals can be extended to the nonstandard reals and remains true.
As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosophers such as Jeremy Bentham and John Stuart Mill. The term has been adapted and reapplied within neoclassical economics, which dominates modern economic theory, as a utility function that represents a single consumer's preference ordering over a choice set but is not comparable across consumers. This concept of utility is personal and based on choice rather than on pleasure received, and so is specified more rigorously than the original concept but makes it less useful for ethical decisions.
In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, any combinations of two products indicated by the curve will provide the consumer with equal levels of utility, and the consumer has no preference for one combination or bundle of goods over a different combination on the same curve. One can also refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. In other words, an indifference curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer. Utility is then a device to represent preferences rather than something from which preferences come. The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles.
In mathematics, the system of hyperreal numbers is a way of treating infinite and infinitesimal quantities. The hyperreals, or nonstandard reals, *R, are an extension of the real numbers R that contains numbers greater than anything of the form
The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their preferences subject to limitations on their expenditures, by maximizing utility subject to a consumer budget constraint. Factors influencing consumers' evaluation of the utility of goods: income level, cultural factors, product information and physio-psychological factors.
Utility maximization was first developed by utilitarian philosophers Jeremy Bentham and John Stuart Mill. In microeconomics, the utility maximization problem is the problem consumers face: "How should I spend my money in order to maximize my utility?" It is a type of optimal decision problem. It consists of choosing how much of each available good or service to consume, taking into account a constraint on total spending (income), the prices of the goods and their preferences.
In microeconomics, a consumer's Marshallian demand function is the quantity they demand of a particular good as a function of its price, their income, and the prices of other goods, a more technical exposition of the standard demand function. It is a solution to the utility maximization problem of how the consumer can maximize their utility for given income and prices. A synonymous term is uncompensated demand function, because when the price rises the consumer is not compensated with higher nominal income for the fall in their real income, unlike in the Hicksian demand function. Thus the change in quantity demanded is a combination of a substitution effect and a wealth effect. Although Marshallian demand is in the context of partial equilibrium theory, it is sometimes called Walrasian demand as used in general equilibrium theory.
In economics, an ordinal utility function is a function representing the preferences of an agent on an ordinal scale. Ordinal utility theory claims that it is only meaningful to ask which option is better than the other, but it is meaningless to ask how much better it is or how good it is. All of the theory of consumer decision-making under conditions of certainty can be, and typically is, expressed in terms of ordinal utility.
Revealed preference theory, pioneered by economist Paul Anthony Samuelson in 1938, is a method of analyzing choices made by individuals, mostly used for comparing the influence of policies on consumer behavior. Revealed preference models assume that the preferences of consumers can be revealed by their purchasing habits.
In microeconomics, the property of local nonsatiation (LNS) of consumer preferences states that for any bundle of goods there is always another bundle of goods arbitrarily close that is strictly preferred to it.
In economics, convex preferences are an individual's ordering of various outcomes, typically with regard to the amounts of various goods consumed, with the property that, roughly speaking, "averages are better than the extremes". The concept roughly corresponds to the concept of diminishing marginal utility without requiring utility functions.
Competitive equilibrium is a concept of economic equilibrium introduced by Kenneth Arrow and Gérard Debreu in 1951 appropriate for the analysis of commodity markets with flexible prices and many traders, and serving as the benchmark of efficiency in economic analysis. It relies crucially on the assumption of a competitive environment where each trader decides upon a quantity that is so small compared to the total quantity traded in the market that their individual transactions have no influence on the prices. Competitive markets are an ideal standard by which other market structures are evaluated.
In economics and other social sciences, preference refers to the order in which an agent ranks alternatives based on their relative utility. The process results in an "optimal choice". Preferences are evaluations and concern matters of value, typically in relation to practical reasoning. An individual's preferences are determined purely by a person's tastes instead of the good's prices, personal income, and the availability of goods. However, people are still expected to act in their best (rational) interest. In this context, rationality would dictate that an individual will select the option that maximizes self-interest when given a choice. Moreover, in every set of alternatives, preferences arise.
Fair item allocation is a kind of a fair division problem in which the items to divide are discrete rather than continuous. The items have to be divided among several partners who value them differently, and each item has to be given as a whole to a single person. This situation arises in various real-life scenarios:
In economics, the Debreu theorems are several statements about the representation of a preference ordering by a real-valued function. The theorems were proved by Gerard Debreu during the 1950s.
In decision theory, a multi-attribute utility function is used to represent the preferences of an agent over bundles of goods either under conditions of certainty about the results of any potential choice, or under conditions of uncertainty.
In economics and consumer theory, a linear utility function is a function of the form:
Efficiency and fairness are two major goals of welfare economics. Given a set of resources and a set of agents, the goal is to divide the resources among the agents in a way that is both Pareto efficient (PE) and envy-free (EF). The goal was first defined by David Schmeidler and Menahem Yaari. Later, the existence of such allocations has been proved under various conditions.
Fisher market is an economic model attributed to Irving Fisher. It has the following ingredients:
In theoretical economics, an abstract economy is a model that generalizes both the standard model of an exchange economy in microeconomics, and the standard model of a game in game theory. An equilibrium in an abstract economy generalizes both a Walrasian equilibrium in microeconomics, and a Nash equilibrium in game-theory.
Ordinal Pareto efficiency refers to several adaptations of the concept of Pareto-efficiency to settings in which the agents only express ordinal utilities over items, but not over bundles. That is, agents rank the items from best to worst, but they do not rank the subsets of items. In particular, they do not specify a numeric value for each item. This may cause an ambiguity regarding whether certain allocations are Pareto-efficient or not. As an example, consider an economy with three items and two agents, with the following rankings:
