Preference (economics)
In economics, and in other social sciences, preference refers to an order by which an agent, while in search of an "optimal choice", ranks alternatives based on their respective utility.
[1] Individual preferences are determined by taste, need, ..., as opposed to price, availability or personal income.
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.
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.
[6] Traditional neoclassical economics has worked with the assumption that the preferences of agents in the economy are fixed.
In 1926, Ragnar Frisch was the first to develop a mathematical model of preferences in the context of economic demand and utility functions.
This omission ceased when, at the end of the 19th and the beginning of the 20th century, logical positivism predicated the need to relate theoretical concepts to observables.
Von Neumann and Morgenstern's 1944 book "Games and Economic Behavior" treated preferences as a formal relation whose properties can be stated axiomatically.
These types of axiomatic handling of preferences soon began to influence other economists: Marschak adopted it by 1950, Houthakker employed it in a 1950 paper, and Kenneth Arrow perfected it in his 1951 book "Social Choice and Individual Values".
[11] Gérard Debreu, influenced by the ideas of the Bourbaki group, championed the axiomatization of consumer theory in the 1950s, and the tools he borrowed from the mathematical field of binary relations have become mainstream since then.
[12] Historically, preference in economics as a form of utility can be categorized as ordinal or cardinal data.
Ordinal utility, in summation, is the direct following of preference, where an optimal choice is taken over a set of parameters.
A person is expected to act in their best interests and dedicate their preference to the outcome with the greatest utility.
Marshall found that "a good deal of the analysis of consumer behavior could be greatly simplified by assuming that the marginal utility of income is constant" (Robert H.
Transitivity of preferences is a fundamental principle shared by most major contemporary rational, prescriptive, and descriptive models of decision-making.
[8] Consumers whose preference structures violate transitivity would get exposed to being exploited by some unscrupulous person.
In that case, it is unnecessary to attach a preference order to those alternatives (although it can be nice to dream about what one would do if one won the lottery).
An indifference curve[20] is a graphical representation that shows the combinations of quantities of two goods for which an individual will have equal preference or utility.
When an industry has a new competitor who has found ways to make the goods or services work more effectively, it can change the market completely.
Changes in technology examples are but are not limited to increased efficiency, longer-lasting batteries, and a new easier interface for consumers.
Similarly, if an individual tends to be risk-averse but is exposed to a group of risk-seeking people, his preferences may change over time.
Convexity is one of the prerequisites for a rational consumer in the market when maximizing his utility level under the budget constraint.
The literature on preferences is far from being standardized regarding terms such as complete, partial, strong, and weak.
Together with the terms "total", "linear", "strong complete", "quasi-orders", "pre-orders", and "sub-orders", which also have different meanings depending on the author's taste, there has been an abuse of semantics in the literature.
[30] Georgescu-Roegen pointed out that the measurability of the utility theory is limited as it excludes lexicographic preferences.
Causing an amplified level of awareness placed upon lexicographic preferences as a substitute hypothesis on consumer behaviour.
[30] According to Kreps "beginning with strict preference makes it easier to discuss non-comparability possibilities".
[32] The mathematical foundations of most common types of preferences — that are representable by quadratic or additive utility functions — laid down by Gérard Debreu[33][34] enabled Andranik Tangian to develop methods for their elicitation.
Similar conflicts with the principle can be seen in choices that involve bulky goods in a limited space, such as an excess of furniture in a small house.
