• Home
  • Issues
  • 2020
  • No 2
  • Proof of the Invisible Hand: Why the satisficing purchase becomes optimal?

Proof of the Invisible Hand: Why the satisficing purchase becomes optimal?

TERRA ECONOMICUS, , Vol. 18 (no. 2),

The paper develops the systematic analysis of the self-organization mechanisms of the imperfect market under price dispersion by means of the “labor-searchleisure” model. The model proves the fact that the inequality of the marginal values of search, produced by the satisficing decision, ends with the consumptionleisure corner solution where the consumer quits the market without purchase. If the consumer tries to get rid of the disappointment of the search, he exits from the corner and the first offer, which corresponds to his aspiration level, becomes satisficing as well as optimal; it equalizes the marginal values of the search and maximizes the consumption-leisure utility. The match of the satisficing and optimal buying decisions opens the door for a deeper analysis of the self-organization of the imperfect market. If the consumer evaluates correctly his purchasing power and his real wage rate before he starts to work and to search, the unit elasticity of the costs on purchase with respect to consumption automatically makes optimal any quantity purchased for the given time horizon. However, the unit elasticity rule tells nothing about the distribution of labor and search costs; it simply states the fact that this distribution is optimal and it equalizes the marginal costs of search with its marginal benefit. The act of the successful buying proves the fact that the total consumer efforts on the search and the purchase are unit elastic with respect to consumption. It means that the unit elasticity rule is followed by some inner pricing mechanism. This mechanism leads the self-interested producer to make an offer, which provides the automatic optimal consumer’s labor-search trade-off and proves in this way the hypothesis of the “invisible hand”.
Citation: Malakhov, S. (2020). Proof of the Invisible Hand: Why the satisficing purchase becomes optimal? Terra Economicus, 18(2), 70–94. DOI: 10.18522/2073-66062020-18-2-70-94

Keywords: invisible hand; satisficing decision; optimal consumption-leisure choice; price dispersion

JEL codes:

  • Arrow, K. (1993). The potentials and limits to the market in resource allocation. THESIS,
  • (2), 53–68. (In Russian.)
  • Baxley, J. V., Moorhouse, J. C. (1984). Lagrange Multiplier Problems in Economics. American Mathematical Monthly, 91 (7), 404–412.
  • Becker, G. S. (1994). Assortative Mating in Marriage Markets. THESIS, (6), 12–36. (In Russian.)
  • Blackʼs Law Dictionary (2009). West Publishing, 1943 p.
  • Fellner, G., Guth, W., Martin, E. (2006). Satisficing or Optimizing? An Experimental Study.
  • Max-Planck-Institut für Ökonomik. Papers on Strategic Interaction, 11.
  • Friedman, M., Savage, L. J. (1948). The Utility Analysis of Choices Involving Risk. The Journal of Political Economy, 56 (4), 279–304.
  • Gribbin, J. (2000). Q is for Quantum: An Encyclopedia of Particle Physics. First Touchstone Edition, 453 p.
  • Jerome, K. J. (1889). Three men in a boat (to say nothing of the dog). Bristol: J.W. Arrowsmith. London: Simpkin, Marshall, Hamilton, Kent & Co., Limited.
  • Kapteyn, A., Wansbeek, T., Buyze, J. (1979). Maximizing or Satisficing. The Review of Economics and Statistics, 61 (4), 549–563.
  • Lewer, J., Gerlich, N., Gretz, R. (2009). Maximizing and Satisficing Consumer Behavior: Model and Test. Southwestern Economic Review (Texas Christian University), 36 (1). http://ssrn.com/abstract=1740002
  • Malakhov, S. (2011). Towards a New Synthesis of Neoclassical Paradigm and Search – Satisficing Concept. IAREP/SABE Annual Conference, Exeter, UK.
  • Malakhov, S. (2013). Veblen effect, the marginal utility of money, and money illusion. Journal of Institutional Studies, 5 (3), 58–80. (In Russian.)
  • Malakhov, S. (2014). Satisficing Decision Procedure and Optimal Consumption-Leisure Choice. International Journal of Social Science Research, 2 (2), 138–151. http://dx.doi. org/10.5296/ijssr.v2i2.6158
  • Malakhov, S. (2016). Law of one price and optimal consumption-leisure choice under price dispersion. Expert Journal of Economics, 4 (1), 1–8.
  • Malakhov, S. (2018). Self-organization of imperfect markets under equilibrium price dispersion: Invisible hand against conspicious consumption. Journal of Institutional Studies, 10 (2), 6–25. DOI: 10.17835/2076-6297.2018.10.2.006-025 (In Russian.)
  • Malakhov, S. (2019). Complementarity and substitutability in the consumption-leisure choice under equilibrium price dispersion: From the «theorem of lemons» to the
  • Coase theorem. Journal of Institutional Studies, 11 (1), 55–80. DOI: 10.17835/20766297.2019.11.1.055-080 (In Russian.)
  • Malakhov, S. (2020a). Consumersʼ diligence as a natural way to cope with externalities: From the Coase theorem to the Invisible hand. Journal of Institutional Studies, 12 (1),
  • 39–65. DOI: 10.17835/2076-6297.2020.12.1.038-065 (In Russian.)
  • Malakhov, S. (2020b). Law of Nature or Invisible Hand: when the satisficing purchase becomes optimal. WP, Berkeley University Press. https://works.bepress.com/sergey_malakhov/22/
  • Schwartz, B., Ward, A., Monterosso, J., Lyubomirsky, S., White, K., Lehman, D. (2002). Maximizing Versus Satisficing: Happiness is a Matter of Choice. Journal of Personality and Social Psychology, 83 (5), 1178–1197.
  • Simon, H. (1972). Theories of Bounded Rationality, pp. 161–176 / In: C.B. Mcguire, R. Radner (eds.) Decision and Organization. Nort-Holland Publishing Company.
  • Simon, H. (1978). Rationality as Process and as Product of Thought. American Economic Review, 68 (2), 1–16.
  • Simon, H. A. (1976). From substantive to procedural rationality / In: T.J. Kastelein, S.K. Kuipers, W.A. Nijenhuis, G.R. Wagenaar (eds.) 25 Years of Economic Theory. Boston, MA: Springer.
  • Slote, M. (1989). Beyond Optimizing: a study of rational choice. Harvard University Press.
  • Smith, A. (1976). An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford: Oxford University Press.
  • Stigler, G. (1961). The Economics of Information. Journal of Political Economy, 69 (3), 213–225.
  • Thaler, R. (1980). Toward a Positive Theory of Consumer Choice. Journal of Economic Behavior and Organization, 1, 39–60.
  • Thaler, R. (1987). The Psychology of Choice and the Assumptions of Economics, pp. 99–130 / In: A.E. Roth (ed.) Laboratory experimentation in economics: six points of view. Cambridge University Press.
  • Tolstoy, L. (2019). Anna Karenina. Moscow: Eksmo Publ., 800 p. (In Russian.)
  • Veblen, T. (1899). The Theory of the Leisure Class: An Economic Study of Institutions. New York.
  • Viner, J. (1925). The Utility Concept in Value Theory and Its Critics. Journal of Political Economy, 33, 638–659.
Publisher: Southern Federal University
Founder: Southern Federal University
ISSN: 2073-6606