A market economy is one that’s run by the aggregate of individual consumers (and firms) looking to increase their own utility, rather than being planned out (i.e. a “planned economy”). Call it “market forces,” or the “invisible hand." These are the things that make a market economy a market economy.
Most countries have mixed economies, with some market economy parts and some planned economy parts. Even if you feel like you’re living in a market economy, you’re probably living in a mixed economy. Real life’s not an Ayn Rand novel. In the U.S., things like firefighters, social security, and public education are all aspects of our economy that are planned, even if most of the rest of our consumer lives are mostly a market economy.
Even if pure market economies aren’t really a thing in the real world, they’re often an underlying assumption in some basic economic models, so it’s good to understand that the market forces of self-interest, supply, and demand...are what make a market economy tick.
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Econ: What is Utility Maximization?4 Views
And finance Allah Shmoop What is utility maximization All right
Those three tennis courts the four swimming pools and the
porcelain fountain imported from Milan You own them all Not
to mention a G six with a hot tub and
your own basketball team So think of your resource is
as being well infinite Mohr less so Utility maximization wouldn't
come up much in your life That is You're not
too worried about using your pencil after you sharpen it
so that it's only two inches long before you throw
it out you just toss it rather than use another
inch Well utility maximization has to do with decisions consumers
make as they spend Their limited resource is all right
now you're this guy You get a modest paycheck You
have to figure out how to divide it up to
survive You've got rent food utilities entertainment and all the
other stuff you need Thio live So the basic question
with regard to utility maximization for you Well how do
consumers budget they're spending in order to get the most
out of it In other words how do they maximize
utility Or how do you do this Utility maximization has
to do with value Or rather how you allocate precious
resource is AII Cash So it produces the most value
to you the consumer Or set another way How do
consumers get the most satisfaction from spending their hard earned
dollars Well question How many gold plated toilets is Jeff
Bezos founder of Amazon Limited to buy Answer He isn't
limited by budget He is however limited by the happiness
Each additional gold plated toilet gets him Well the guy
has couple hundred billion dollars That's with a B in
Amazon stock wealth so he doesn't spend a nanosecond worrying
about resource allocation He just buys whatever he wants No
no no Mr Yacht broker I'll take two of them
well but a normal person would probably not take both
the pink and the green Buffy and Muffy yachts In
fact they wouldn't even be able to afford one yacht
of shame Normal people have constrained budgets and before they
spend their dough they predicted given level of satisfaction they
quote achieve unquote from hitting that by now button What
they have to spend is essentially a kind of mathematical
constraint on there Happiness or utility or ability to make
their life better What they have to spend is a
constraint on their budget They need to make tradeoffs among
the items they need to buy based on the happiness
each additional unit of whatever gets them So now back
to the average Joe liberal arts major your big tradeoff
choices might be more about buying ramen noodles in bulk
or getting the soft toilet paper hint by the ramen
You can always borrow toilet paper from the Burger King
bathroom or you know there's a newspaper laying around somewhere
This dynamic is called a budget constraint beautifully graphically illustrated
here for your viewing pleasure Yeah Check this out And
here's a graph of Jeff Bezos Budget constraint Yeah not
much constraint you know financially yet Well utility maximization is
all about these budget choices The goal of utility maximization
is to get the most value from the money you
have available to spend As an example We're making tradeoffs
between toilet paper and Rahman Here we have a budget
that shows our trade offs of the two Well here's
an indifference curve which measures the happiness we get from
each and where the slope of the indifference curve is
tangent to the budget constraint That's where we have the
maximum utility IAEA happiness within our budget constraint Getting all
this all right Now let's talk about another trade off
You have fifty boxes your last fifty bucks and it
has to last you nine days until your next liberal
arts style paycheck comes Costco the discount retailer has super
bulk boxes of Rahman on sale in a cost for
one month worth of noodles Well fifty bucks which is
grey but for the fact that you will be evicted
in an hour And the cost to remain in your
hovel into the freeway for nine more days happens to
be exactly fifty dollars Well that's the amount You pay
the head bum to tell the other bums not to
beat you senseless at night and steal your liver while
you're sleeping on the freeway there So you have a
trade off here You can either eat or you Khun
B Sheltered but you can't do both So in theory
there should be a tradeoff you could make where fell
Maybe you share a cardboard box with another bum for
twenty five dollars for nine days and spend the remaining
twenty five dollars on the well two weeks worth of
noodles that will get you through until you can collect
your next paycheck As you rue the day you know
that you did that whole liberal arts major thing Well
because economists are economists they have a bunch of mathematical
formulas to optimize the budget allocation of your precious dollars
The basic notion behind this math revolves around the idea
that consumers will allocate their money so that they get
the most marginal utility for each dollar they spend Right
Last dollar it's going to go in the best place
to them Okay Last concept for understanding utility maximization here
for marginal utility is the amount of extra use you
get out of buying mohr of something like you need
some rahmon to keep you alive But you don't need
like forty pounds of it to keep you alive For
just nine days A storage locker full of Rahman will
not do much good for you It would just sit
around doing nothing right What One pair of pants is
good for keeping your legs warm and making sure you
don't get it You know arrested you know been there
done that But a thousand para pants Well just wasteful
There's not much marginal utility being gained from that thousand
pair of you know khaki Dockers So utility maximization involves
trying to get the most value Out of limited resource
is such that the N plus one unit then begins
to decline dramatically in value art Example Like if you
need two thousand calories a day to basically maintain your
current weight and one packet of Rahm and his five
hundred calories Well then if you need to survive nine
days while you'll want four packets a day for nine
days or thirty six packets to just keep you alive
until your next paycheck after nine days At that point
you hope you can afford to make a change in
your life and lifestyle But for now you realize that
you would probably die or at least suffer greatly If
you went with no Roman for all nine days and
just tried to survive on water you would gain great
utility from having at least one packet today for nine
days But you'd realize that you have lost so much
weight in living on five hundred calories a day That
the storage locker of a thousand docker pants would have
almost no hands that fit you anymore Yeah you would
continue to gain meaningful marginal value from that second and
third packets of Rahman a day getting you to a
fifteen hundred calories a day Such that Well you might
only lose a few pounds over the course of those
nine days until you got that golden paycheck That'd be
just fine And after for four packet today well the
value of those Rahman noodles begins to decline massively or
set another way there Marginal utility than approaches Zero Well
this set of calculations mirrors the marginal utility value model
with the goal of getting the most marginal utility out
of each dollar or the most rum and out of
the dollar which is actually quite a bit of Roman
and
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