![]() The utility maximization problem serves not only as the mathematical foundation of consumer theory but as a metaphysical explanation of it as well. 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 is the heart of consumer theory. With the necessary tools and assumptions in place the utility maximization problem (UMP) is developed. Without the assumption of LNS (local non-satiation) there is no 100% guarantee but there would be a rational rise It is at this point that economists make the technical assumption that preferences are locally non-satiated. Microeconomic theory progresses by defining a competitive budget set which is a subset of the consumption set. ![]() 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. The technical assumption that preference relations are continuous is needed to ensure the existence of a utility function. To economists, rationality means an individual possesses stable preferences that are both complete and transitive. ![]() Microeconomic theory typically begins with the study of a single rational and utility maximizing individual. 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). Particularly in the wake of the Lucas critique, much of modern macroeconomic theories has been built upon microfoundations-i.e., based upon basic assumptions about micro-level behavior. Microeconomics also deals with the effects of economic policies (such as changing taxation levels) on microeconomic behavior and thus on the aforementioned aspects of the economy. While microeconomics focuses on firms and individuals, macroeconomics focuses on the sum total of economic activity, dealing with the issues of growth, inflation, and unemployment-and with national policies relating to these issues. ![]() It also analyzes market failure, where markets fail to produce efficient results. Microeconomics shows conditions under which free markets lead to desirable allocations. One goal of microeconomics is to analyze the market mechanisms that establish relative prices among goods and services and allocate limited resources among alternative uses. Microeconomics focuses on the study of individual markets, sectors, or industries as opposed to the national economy as whole, which is studied in macroeconomics. Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics analyzes the market mechanisms that enable buyers and sellers to establish relative prices among goods and services. ![]()
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