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Work of invisible hand: the gravitation between sellers and buyers on the consumption-leisure production possibility frontier

Sergey Malakhov

MPRA Paper from University Library of Munich, Germany

Abstract: If the equilibrium price is equal to the lowest willingness to pay of consumers with zero search costs, it accumulates under price dispersion the willingness to sell of consumers with positive search costs. The satisficing searcher buys at a low price, which unintentionally equalizes marginal costs of his search with its marginal benefit and maximizes his consumption-leisure utility with regard to the equilibrium price. Labor and search costs are unit elastic with respect to the quantity demanded. Suboptimal choices reproduce initial corner solutions; satisficing purchases become optimal; consumers either buy optimally or quit the market. The producer’s knowledge is limited by the quantity demanded, but he meets the consumer with a price, like he knows in advance his willingness to pay and the time spent on search. The consumption-leisure production possibility frontier optimally allocates his time between production and delivery; it determines not only the price for the quantity demanded, but also the meeting point, where the producer stops consumer’s search and sells him goods with leisure. Being unaware of how much the consumer has spent on labor and search, the producer unintentionally optimizes his consumption-leisure choice. The transformation of producer’s time into consumer’s leisure time discovers the rate of their mutual interest or their gravitation, where its force is directly proportional to the product of quantity supplied and quantity demanded, and inversely proportional to the product of times the parties to the transaction have spent on it.

Keywords: invisible hand; consumption-leisure choice; production possibility frontier; search; price dispersion; gravitation (search for similar items in EconPapers)
JEL-codes: D11 D83 (search for similar items in EconPapers)
Date: 2021-03-22
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