Economía

mi
PAR T
o N E

Individual
Decision Making
A distinctivc featurc of microeeonomic theory is that it aims to model economic activity as an interaction of individual economic agents pursuing their private interests. It is thercfore appropriate that we begin our study of microeconomie theory with an analysis 01' individual decision making.
Chapter 1 is short and preliminary. It consistsof an introduction to the theory 01' individual decision making considered in an abstract setting. It introduces the decision maker and hcr choice problem, and it describes two related approaches to modeling hcr decisions. One, the pre{erence-based approach, assumes that the decision maker has a preference relation over her set of possible choices that satisfies certain rationality axioms. Theother, the choice-based approach, focuses directly on the decision rnakcr's choice behavior, imposing consistency restrictions that parallel the rationality axioms of the preference-based approach.
The rcmaining chapters in Part One study individual decision making in explicitly economic contexts. It is common in microeconomics texts-and this text is no cxception to distinguish between two sets ofagents in the economy: individual consumers and jirms. Because individual consumers own and run firms and therefore ultirnately determine a firrn's actions, they are in a sense the more fundamental clernent of an economic model. Hence, we begin our review of the theory of economic decisin rnaking with an examination of the consumption side of the economy.
Chapters 2 and 3 study the behavior ofconsumers in a market economy. Chapter 2 begins by describing the consumer's decision problem and then introduces the concept of the consumer's demand [unction. We then proceed to investigate the irnplications for the demand function of several natural properties of consumer demando This investigation constitutes an analysis of consumer behavior in the spirit of the choicc-based approach introducedin Chapter 1.
In Chapter 3, we develop the classical preference-based approach to consumer demando Topics such as utility maximization, expenditure minimization, duality, integrability, and the mcasurement of welfare changes are studied there. We also discuss thc relation between this theory and the choice-based approach studied in Chapter 2.
In econornic analysis, the aggregate behavior ofconsumers is often more important than the bchavior of any single consumer. In Chapter 4, we analyze the
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4 PART 1: INDIVIDUAL DECISION MAKING
extent to which the properties of individual demand discussed in Chapters 2 and 3 also hold for aggregate eonsumer demando
In Chapter 5, we study the behavior of the firmo We begin by posing the firm'sdecision problern, introducing its technological constraints and the assumption of profit maximization. A rich theory, paralleling that for consumer demand, emerges. In an important sen se, however, this analysis constitutes a first step because it takes the objective of profit maximization as a maintained hypothesis. In the last section of the chapter, we comment on the circumstances under whichprofit maximization can be derived as the desired objective of the firrn's owners.
Chapter 6 introduces risk and uncertainty into the theory of individual decision making. In most economic decision problems, an individual's or firm's choices do not rcsult in perfectly certain outcomes. The theory of decision making under uncertainty devcloped in this chapter therefore has wide-ranging applicationsto economic problerns, many of which we discuss later in the book.


5
e H A P TER
Preference and Choice
1
1.A Introduction
In this chaptcr, we hegin our study of the theory of individual deeision making by eonsidering it in a eompletely abstraet setting. The remaining ehapters in Part I dcvclop the analysis in the eontext of explieitly eeonomie...