Following up from our introduction to economics/macroeconomics article, this post talks about ‘self-interest’ and maximizing over a set of preferences subject to constraints.
Let’s start off with some examples, but first, the tools we’ll need (some images used because it’s a bit tough to get the right characters).
Consumption Bundle (CB):
Preference Ordering: Will use statements to rank bundles from least to most. It is possible to construct if: 1. You are always able to make such a statement, 2. Statements are consistent.
Let’s explore some of these ordering assumptions.
A1 – “Completeness” Assumption: Given any two CB’s, one of them is true.
A2 – “Consistency or Transivity” Assumption: Given any 3 CBs:
A1 and A2 are CORE assumptions about preferences or rational decision markers.
Taken together they guarantee an individual can consistently rank any set of CB. (They have complete preference ordering.)
A3 – “Non-satiation” Assumption: If some is good, more is better.
A4 – “Maximization” Assumption: Individuals always make choices that maximize their preference ordering.
The implications of A3 and A4 are:
1. Scarcity, you always want more than what’s available.
2. People always fully exploit opportunities (all gains from trade are exhausted in equilibrium).
3. Imposes argument to explain behaviour.
In part two, a bit on trade offs and more assumptions.
[tags]consumption bundle, consumer, assumptions[/tags]