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Pastimes : Austrian Economics, a lens on everyday reality
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To: gpowell who wrote (281)11/17/2003 5:45:13 PM
From: gpowell  Read Replies (1) of 445
 
Further Notes on MRS.

As decision makers move towards utility maximization, the path becomes indeterminate at points of indifference. When a decision maker faces a move to a state of higher utility, and if there is more than one state at this same higher utility, we cannot predict which state the decision maker will chose.

Indifference sets are used to contain these equally preferred states and each point in the indifference set becomes an equally likely point of exchange. In addition, each state in the indifference set has a relationship with every other state in the set - this relationship is defined by the marginal rate of substitution between states.

As individual decision makers become coordinated in exchange markets, it is the intersection of indifference sets that define which exchanges will occur. The utility maximization principle places a condition that the exchange will occur at points where the marginal rate of substitution of the market participants are equal.
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