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Concept
Preference (economics)
Summary
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" (whether real or theoretical). Preferences are evaluations and concern matter of value, typically in relation to practical reasoning. An individual's preferences are determined purely by a person's tastes as opposed to 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.
The concept of preference plays a key role in many disciplines, including moral philosophy and decision theory. The logical properties that preferences possess also have major effects on rational choice theory, which in turn affects all modern economic topics.
Using the scientific method, social scientists aim to model how people make practical decisions in order to explain the causal underpinnings of human behaviour or to predict future behaviours. Although economists are not typically interested in the specific causes of a person's preferences, they are interested in the theory of choice because it gives a background to empirical demand analysis.
Stability of preference is a deep assumption behind most economic models. Gary Becker drew attention to this with his remark that "the combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach as it is." More complex conditions of adaptive preference were explored by Carl Christian von Weizsäcker in his paper "The Welfare Economics of Adaptive Preferences" (2005), while remarking that. Traditional neoclassical economics has worked with the assumption that the preferences of agents in the economy are fixed.
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Utility maximization problem
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.
Ordinal utility
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. For example, suppose George tells us that "I prefer A to B and B to C".
Revealed preference
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. Revealed preference theory arose because existing theories of consumer demand were based on a diminishing marginal rate of substitution (MRS).