Law of nature or invisible hand: when the satisficing purchase becomes optimal

Malakhov, Sergey (2020): Law of nature or invisible hand: when the satisficing purchase becomes optimal.

Abstract

The transformation of the classical labor-leisure choice into the labor-search-leisure choice enables the analysis of the individual behavior under price dispersion. The consumer maximizes his consumption-leisure utility with respect to the equality of marginal loss on the search with its marginal benefit. The satisficing approach challenges this equality but the analysis of the moment of the intention to buy, when real balances and supplies as well as the knowledge about the price distribution are close to zero, discovers the unit elasticity of total consumer’s efforts on purchase with respect to any level of consumption for the given time horizon. If at the beginning the consumer evaluates correctly his purchasing power with respect to the market trade-off of leisure for consumption and if he is realistic about what he can buy with his efforts, he avoids the computational complexity of marginal values because the unit elasticity rule mechanically reproduces his optimal psychic consumption-leisure trade-off. The reproduction of the optimal choice by the unit elasticity rule looks like the law of nature but the optimal allocation of time between the labor and the search at any level of consumption, which. maximizes the consumption-leisure utility, appears like the work of the invisible hand. The satisficing decision with the inequality of the marginal values of search comes to the corner solution, when the consumer doesn’t make efforts on labor and search because the quantity demanded is not worth these efforts. If the consumer challenges the corner solution and start to work and to search, the unit elasticity rule reproduces high prior expectations and the outcome results in the disappointment on purchase. The unit elasticity rule provides the exit for the satisficing decision-making from the corner. If the consumer gradually changes his aspiration level and his optimistic prior expectations during the search, once he finds the satisficing price for the quantity demanded and the disappointment is gone. But the first satisficing offer, which doesn’t generate the disappointment, is the optimal one. The satisficing suboptimal purchase of the item of the immediate consumption occurs, when real balances, supplies, and knowledge are positive. These positive values produce the noise, which weakens the unit elasticity rule and make it useless. Under the unworkable unit elasticity rule the optimal choice really needs cumbersome calculations, and the consumer prefers to choose the first satisficing offer. The satisficing purchase of the durable item becomes necessary because the consumer substitutes the uncertainty of the search by the certainty of the use of the item and optimizes his consumption-leisure choice during its lifecycle with the help of his willingness to take care of the big-ticket purchase. The consumer stops to care for the durable item, when the efforts on its following use are expected greater than on average. This simple commonsense rule produces the equality of the marginal costs with the average after-purchase costs and becomes the sufficient condition to optimize the prior purchase. While the following negative willingness to take care exponentially raises the maintenance costs, the equality of the marginal and average after-purchase costs results in the optimal consumption-leisure choice of the purchase and exhibits the right moment to replace or to sell the item.

• Item Type: MPRA Paper
• Language: English
• Keywords: satisficing, optimal consumption-leisure choice, search, equilibrium price dispersion, invisible hand, willingness to take care
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness

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