Editing Microeconomics (section)

== Assumptions and definitions ==
Microeconomic study historically has been performed according to general equilibrium theory, developed by Léon Walras in ''Elements of Pure Economics'' (1874) and partial equilibrium theory, introduced by Alfred Marshall in ''Principles of Economics'' (1890).<ref>{{Citation |last=Kriesler |first=Peter |title=Partial Equilibrium Analysis |date=2016 |url=https://doi.org/10.1057/978-1-137-47529-9_4 |work=Post-Keynesian Essays from Down Under Volume IV: Essays on Theory: Theory and Policy in an Historical Context |pages=33–37 |editor-last=Halevi |editor-first=Joseph |access-date=2023-07-30 |place=London |publisher=Palgrave Macmillan UK |language=en |doi=10.1057/978-1-137-47529-9_4 |isbn=978-1-137-47529-9 |editor2-last=Harcourt |editor2-first=G. C. |editor3-last=Kriesler |editor3-first=Peter |editor4-last=Nevile |editor4-first=J. W.}}</ref>

Microeconomic theory typically begins with the study of a single rational and [[Utility maximization problem|utility maximizing]] individual. To economists, [[rationality]] means an individual possesses stable [[Preference (economics)|preferences]] that are both [[Preference (economics)#Types of preferences|complete]] and [[transitive relation|transitive]]. 
 
The [[Mathematical economics|technical]] assumption that preference relations are [[Continuous function|continuous]] is needed to ensure the existence of a [[Utility#Quantifying utility|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 function|differentiable]].

Microeconomic theory progresses by defining a [[Budget set|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 [[Local nonsatiation|locally non-satiated]]. Without the assumption of LNS (local non-satiation) there is no 100% guarantee but there would be a rational rise<ref>{{Cite book |last1=Mas-Colell |first1=Andreu |url=https://books.google.com/books?id=KGtegVXqD8wC |title=Microeconomic Theory |last2=Whinston |first2=Michael Dennis |last3=Green |first3=Jerry R. |date=1995 |publisher=Oxford University Press |isbn=978-0-19-507340-9 |language=en}}</ref> in individual [[utility]]. With the necessary tools and assumptions in place the [[Utility maximization problem|utility maximization problem (UMP)]] is developed.

The utility maximization problem is the heart of [[Consumer choice|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.<ref>{{Cite web |title=Are the Preference Axioms Really Rational? - ProQuest |url=https://www.proquest.com/docview/1303209289 |access-date=2025-01-28 |website=www.proquest.com | id={{ProQuest|1303209289}} |language=en}}</ref> The utility maximization problem serves not only as the mathematical foundation of consumer theory but as a [[Metaphysics|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 set|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 [[Marshallian demand function|Walrasian demand function]] or correspondence. <ref>{{Cite book |last=Dierker |first=E. |url=https://books.google.com/books?id=IqPrCAAAQBAJ&dq=Economists+call+the+solution+to+the+utility+maximization+problem+a+Walrasian+demand+function+or+correspondence.+&pg=PA3 |title=Topological Methods in Walrasian Economics |date=2012-12-06 |publisher=Springer Science & Business Media |isbn=978-3-642-65800-6 |language=en}}</ref>

The utility maximization problem has so far been developed by taking consumer tastes (i.e. consumer utility) as primitive. However, an alternative way to develop microeconomic theory is by taking consumer choice as primitive. This model of microeconomic theory is referred to as [[revealed preference]] theory.
[[Image:Supply-demand-right-shift-demand.svg|thumb|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 D<sub>1</sub> to D<sub>2</sub> 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 [[perfect competition|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.

[[Mainstream economics]] does not assume ''[[wikt:a priori#Adjective|a priori]]'' that markets are preferable to other forms of social organization. In fact, much analysis is devoted to cases where [[market failure]]s lead to [[resource allocation]] that is suboptimal and creates [[deadweight loss]]. A classic example of suboptimal resource allocation is that of a [[Public good (economics)|public good]]. In such cases, [[economist]]s may attempt to find policies that avoid waste, either directly by government control, indirectly by regulation that induces market participants to act in a manner consistent with optimal welfare, or by creating "[[missing market]]s" to enable efficient trading where none had previously existed.

This is studied in the field of [[collective action]] and [[public choice theory]]. "Optimal welfare" usually takes on a [[Pareto efficiency|Paretian]] norm, which is a mathematical application of the [[Kaldor–Hicks efficiency|Kaldor–Hicks method]]. This can diverge from the [[Utilitarianism|Utilitarian]] goal of maximizing [[utility (economics)|utility]] because it does not consider the distribution of goods between people. Market failure in positive economics (microeconomics) is limited in implications without mixing the belief of the economist and their theory.

The demand for various commodities by individuals is generally thought of as the outcome of a utility-maximizing process, with each individual trying to maximize their own utility under a [[budget constraint]] and a given consumption set.
=== Allocation of scarce resources ===
Individuals and firms need to allocate limited resources to ensure all '''agents''' in the economy are well off. Firms decide which goods and services to produce considering low costs involving labor, materials and capital as well as potential profit margins. Consumers choose the good and services they want that will maximize their happiness taking into account their limited wealth.<ref name=":1">{{cite book |last1=Perloff |first1=Jeffrey M. |title=Microeconomics |date=2018 |location=New York|isbn=978-1292215693 |edition=8th}}</ref>

The government can make these allocation decisions or they can be independently made by the consumers and firms. For example, in the former Soviet Union, the government played a part in informing car manufacturers which cars to produce and which consumers will gain access to a car.<ref name=":1" />