In Chapter 2 the maximisation and minimisation of real-valued functions was discussed in some detail. In this chapter, this theme is developed in a way which has proved of major significance in economics. Economists frequently model behaviour by assuming that some agent in maximising (or possibly, minimising) some well-defined objective function, subject to a number of constraints. Consumers are supposed to maximise their ‘utility’, subject to a budget constraint. Firms might be assumed to maximise their growth rate subject to a lower limit on profits. Governments’ behaviour is sometimes modelled as the maximisation of a ’social welfare function’ subject to the behavioural constraints of economic agents. In a sense, constrained maximisation has come to represent a kind of paradigm, namely that of rational behaviour. It can be shown for example (see Debreu, 1959), that a rational agent with a certain type of consistent preference will behave as if he or she were maximising a continuous utility function.
KeywordsIncome Marketing Omic Baumol
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- Utility theory is discussed at length by Green (1976). Baumol (1977) and Chiang (1984) contain discussions of constrained optimisation. Dixit (1976) is devoted entirely to optimisation methods and their application in economics. Dixit’s treatment is reasonably advanced, though his notation can be rather opaque. Intrilligator (1971) also provides a moderately advanced discussion of optimisation.Google Scholar
- Baumol (1967) discusses ‘satisficing’ behaviour of firms, and Simon (1959, 1967) and Cyert and March (1963) interpret it as part of a ‘behavioural’ theory of the firm.Google Scholar
- Vanek (1970) is the classic reference on the theory of the labour-managed economy. See also Ireland and Law (1982). Jones and Svejnar (1982) and Stephen (1982) contain some interesting empirical material on self-management and George (1982) reviews some of the issues in this area.Google Scholar