The operative statement in my post is here: If one state is preferred to another and this state is achievable, then the economic decision maker will choose it – even if it is arbitrarily close to being an indifferent state.
My last purchase was the result of an actual and substantial subjective preference, and I wouldn't allow the transaction to be reversed without being forced to do so involuntarily.
This is a true only in certain markets and only for some market participants within those applicable markets.
What you are describing is the difference between the reservation price of a particular decision maker and a market equilibrium price. There will be at least one market participant who is close to indifferent to the transaction.
The reservation price is a direct result of the subjective value assigned to one state over another and defines the price at which an economic decision maker will just enter into an exchange. Initially, in the absence of any formal exchange market, you will be induced into exchange whenever you are left with a higher state of satisfaction.
A market price is derived by the aggregate actions of many buyers and sellers in an exchange market, whereby transactions are observable, which allows a greater coordination of action and can result in a price different from the reservation price. Theoretically, we can sum the difference between each participant’s reservation price and the market price to arrive at the concept of consumer surplus.
A consumer surplus exists in certain types of markets, but not all. Consider a discriminating monopolist who identities buyers, and sells to them at, or more precisely just up to, their reservation price. The consumer enters into this transaction because it increases their subjective utility, yet by definition there is zero consumer surplus and all gains from trade go the monopolist. A drug company that sells the same drug for different prices in separate markets is an example of a discriminating monopolist. Interestingly a market of discriminating monopolists is perato optimal.
Assume that I am willing to pay $2.50 to buy a can of pumpkin pie filling to bake a pie with a pie shell that I already have in the cupboard
The pie shell and the filling are compliments and you have been endowed with the pie shell.
State 1: Endowment of pie shell, some composite good, and cash.
State 2: Endowment of pie shell, filling, some composite good, and cash less $2.50.
State 3: Endowment of pie shell, filling, some composite good, and cash less $5.00
By the problem statement, state 2 is weakly preferred to state 1. The marginal rate of substitution of cash for filling is 2.5. Clearly, state 3 has lower utility than either state 1 or state 2.
My choice is to pay $2.50 too much for the satisfaction of baking and eating a pumpkin pie
State 3 is lower utility than your current state so choosing this state would be irrational.
or to hold $2.50 more in cash than I would have preferred.
You would prefer to move to state 2, but state 2 does not exist. A gain from trade is possible if the marginal cost of producing another can of filling is <$2.50, and the producer uses price discrimination.
The reachable states cannot be indifferent
Assuming you are talking about states 1 and 3 (and that you have $5.00, otherwise state 3 would unreachable) then this is correct, but we already knew that state 3 had lower utility than state 1 – so they cannot be indifferent states.
because the good to be purchased is indivisible.
In this case, the filling is not divisible, is a compliment to pie shells, and both are consumed in equal units.
But even if I could buy half a can, that would not solve the problem because half a can is useless in baking a full pie
What is the problem?
and a half sized pie can't be baked with my existing full sized shell. My satisfaction is also indivisible.
It sure seems like we came a long way to make the point that goods and satisfaction are often, if not mostly, discrete. Yet, this does not in any way invalidate the reality that often there are states that are close substitutes for eachother. Further, the concept of indifferent states leads to useful conclusions about how and why markets develop.
It is the Austrian claim that action cannot be the result of indifference, so there must be an explanation for why my grocery bag contains either a can of pumpkin or cherry pie filling and why I am not still stuck in the store aisle pondering a choice.
By definition, pumpkin and cherry pie filling are perfect substitutes and any state that contains equal amounts of either, or any combination of the two, are the same state - they have the same utility, and the choice then is not an economic decision.
The answer is that apparent indifference inherently brings into play a second choice, i.e. whether to either pick and buy one of the two pie fillings by any means necessary, or to not buy either at all. Since this final choice is definitely rationally inferior to either of the filling choices, one filling will definitely be chosen.
Assuming all consumers are indifferent to these two fillings, zero economic information is communicated in the choice and no further coordinated market adjustments will result.
Should Indifference Curves Be Banished?
Not only are goods not perfectly divisible physically, but human considerations when choosing are even lumpier.
I introduced the concept of “indifference states”, not curves. No constraints were placed upon the nature of the states. |
