Convexity in economics
Convexity in economics is included in the JEL classification codes as JEL: C65 
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Convexity is an important topic in economics.^{[1]} In the Arrow–Debreu model of general economic equilibrium, agents have convex budget sets and convex preferences: At equilibrium prices, the budget hyperplane supports the best attainable indifference curve.^{[2]} The profit function is the convex conjugate of the cost function.^{[1]}^{[2]} Convex analysis is the standard tool for analyzing textbook economics.^{[1]} Non‑convex phenomena in economics have been studied with nonsmooth analysis, which generalizes convex analysis.^{[3]}
Contents
Preliminaries
This section may stray from the topic of the article into the topic of another article, convex analysis. (August 2013)

The economics depends upon the following definitions and results from convex geometry.
Real vector spaces
A real vector space of two dimensions may be given a Cartesian coordinate system in which every point is identified by a list of two real numbers, called "coordinates", which are conventionally denoted by x and y. Two points in the Cartesian plane can be added coordinatewise
 (x_{1}, y_{1}) + (x_{2}, y_{2}) = (x_{1}+x_{2}, y_{1}+y_{2});
further, a point can be multiplied by each real number λ coordinatewise
 λ (x, y) = (λx, λy).
More generally, any real vector space of (finite) dimension D can be viewed as the set of all possible lists of D real numbers { (v_{1}, v_{2}, . . . , v_{D}) } together with two operations: vector addition and multiplication by a real number. For finitedimensional vector spaces, the operations of vector addition and realnumber multiplication can each be defined coordinatewise, following the example of the Cartesian plane.
Convex sets
In a real vector space, a set is defined to be convex if, for each pair of its points, every point on the line segment that joins them is covered by the set. For example, a solid cube is convex; however, anything that is hollow or dented, for example, a crescent shape, is non‑convex. Trivially, the empty set is convex.
More formally, a set Q is convex if, for all points v_{0} and v_{1} in Q and for every real number λ in the unit interval [0,1], the point
 (1 − λ) v_{0} + λv_{1}
is a member of Q.
By mathematical induction, a set Q is convex if and only if every convex combination of members of Q also belongs to Q. By definition, a convex combination of an indexed subset {v_{0}, v_{1}, . . . , v_{D}} of a vector space is any weighted average λ_{0}v_{0} + λ_{1}v_{1} + . . . + λ_{D}v_{D}, for some indexed set of non‑negative real numbers {λ_{d}} satisfying the equation λ_{0} + λ_{1} + . . . + λ_{D} = 1.
The definition of a convex set implies that the intersection of two convex sets is a convex set. More generally, the intersection of a family of convex sets is a convex set.
Convex hull
For every subset Q of a real vector space, its convex hull Conv(Q) is the minimal convex set that contains Q. Thus Conv(Q) is the intersection of all the convex sets that cover Q. The convex hull of a set can be equivalently defined to be the set of all convex combinations of points in Q.
Duality: Intersecting halfspaces
Supporting hyperplane is a concept in geometry. A hyperplane divides a space into two halfspaces. A hyperplane is said to support a set in the real nspace if it meets both of the following:
 is entirely contained in one of the two closed halfspaces determined by the hyperplane
 has at least one point on the hyperplane.
Here, a closed halfspace is the halfspace that includes the hyperplane.
Supporting hyperplane theorem
This theorem states that if is a closed convex set in and is a point on the boundary of then there exists a supporting hyperplane containing
The hyperplane in the theorem may not be unique, as noticed in the second picture on the right. If the closed set is not convex, the statement of the theorem is not true at all points on the boundary of as illustrated in the third picture on the right.
Economics
An optimal basket of goods occurs where the consumer's convex preference set is supported by the budget constraint, as shown in the diagram. If the preference set is convex, then the consumer's set of optimal decisions is a convex set, for example, a unique optimal basket (or even a line segment of optimal baskets).
For simplicity, we shall assume that the preferences of a consumer can be described by a utility function that is a continuous function, which implies that the preference sets are closed. (The meanings of "closed set" is explained below, in the subsection on optimization applications.)
Non‑convexity
If a preference set is non‑convex, then some prices produce a budget supporting two different optimal consumption decisions. For example, we can imagine that, for zoos, a lion costs as much as an eagle, and further that a zoo's budget suffices for one eagle or one lion. We can suppose also that a zookeeper views either animal as equally valuable. In this case, the zoo would purchase either one lion or one eagle. Of course, a contemporary zookeeper does not want to purchase a half an eagle and a half a lion (or a griffin)! Thus, the contemporary zookeeper's preferences are non‑convex: The zookeeper prefers having either animal to having any strictly convex combination of both.
Non‑convex sets have been incorporated in the theories of general economic equilibria,^{[4]} of market failures,^{[5]} and of public economics.^{[6]} These results are described in graduatelevel textbooks in microeconomics,^{[7]} general equilibrium theory,^{[8]} game theory,^{[9]} mathematical economics,^{[10]} and applied mathematics (for economists).^{[11]} The Shapley–Folkman lemma results establish that non‑convexities are compatible with approximate equilibria in markets with many consumers; these results also apply to production economies with many small firms.^{[12]}
In "oligopolies" (markets dominated by a few producers), especially in "monopolies" (markets dominated by one producer), non‑convexities remain important.^{[13]} Concerns with large producers exploiting market power in fact initiated the literature on non‑convex sets, when Piero Sraffa wrote about on firms with increasing returns to scale in 1926,^{[14]} after which Harold Hotelling wrote about marginal cost pricing in 1938.^{[15]} Both Sraffa and Hotelling illuminated the market power of producers without competitors, clearly stimulating a literature on the supplyside of the economy.^{[16]} Non‑convex sets arise also with environmental goods (and other externalities),^{[17]}^{[18]} with information economics,^{[19]} and with stock markets^{[13]} (and other incomplete markets).^{[20]}^{[21]} Such applications continued to motivate economists to study non‑convex sets.^{[22]}
Nonsmooth analysis
This section may require cleanup to meet Wikipedia's quality standards. The specific problem is: Relationship between subderivatives and non‑convexity remains cryptic (August 2013)

Economists have increasingly studied non‑convex sets with nonsmooth analysis, which generalizes convex analysis. "Non‑convexities in [both] production and consumption ... required mathematical tools that went beyond convexity, and further development had to await the invention of non‑smooth calculus" (for example, Francis Clarke's locally Lipschitz calculus), as described by Rockafellar & Wets (1998)^{[23]} and Mordukhovich (2006),^{[24]} according to Khan (2008).^{[3]} Brown (1995, pp. 1967–1968) wrote that the "major methodological innovation in the general equilibrium analysis of firms with pricing rules" was "the introduction of the methods of non‑smooth analysis, as a [synthesis] of global analysis (differential topology) and [of] convex analysis." According to Brown (1995, p. 1966), "Non‑smooth analysis extends the local approximation of manifolds by tangent planes [and extends] the analogous approximation of convex sets by tangent cones to sets" that can be non‑smooth or non‑convex..^{[25]} Economists have also used algebraic topology.^{[26]}
Notes
 ↑ ^{1.0} ^{1.1} ^{1.2} Newman (1987c)
 ↑ ^{2.0} ^{2.1} Newman (1987d)
 ↑ ^{3.0} ^{3.1} Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
 ↑ Pages 392–399 and page 188: Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
Pages 52–55 with applications on pages 145–146, 152–153, and 274–275: Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
Theorem C(6) on page 37 and applications on pages 115–116, 122, and 168: Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
 ↑ Pages 112–113 in Section 7.2 "Convexification by numbers" (and more generally pp. 107–115): Salanié, Bernard (2000). "7 Nonconvexities". Microeconomics of market failures (English translation of the (1998) French Microéconomie: Les défaillances du marché (Economica, Paris) ed.). MIT Press. pp. 107–125. ISBN 0262194430. ISBN 9780262194433.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
 ↑ Pages 63–65: Laffont, JeanJacques (1988). "3 Nonconvexities". Fundamentals of public economics. MIT. ISBN 0262121271. ISBN 9780262121279. External link in
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(help)<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>  ↑ Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
Page 628: Mas–Colell, Andreu; Whinston, Michael D.; Green, Jerry R. (1995). "17.1 Large economies and nonconvexities". Microeconomic theory. Oxford University Press. pp. 627–630. ISBN 9780195073409.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
 ↑ Page 169 in the first edition: Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
In Ellickson, page xviii, and especially Chapter 7 "Walras meets Nash" (especially section 7.4 "Nonconvexity" pages 306–310 and 312, and also 328–329) and Chapter 8 "What is Competition?" (pages 347 and 352): Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
 ↑ Theorem 1.6.5 on pages 24–25: Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
 ↑ Pages 127 and 33–34: Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
 ↑ Pages 93–94 (especially example 1.92), 143, 318–319, 375–377, and 416: Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
Page 309: Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
Pages 47–48: Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
 ↑ Economists have studied non‑convex sets using advanced mathematics, particularly differential geometry and topology, Baire category, measure and integration theory, and ergodic theory: Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
 ↑ ^{13.0} ^{13.1} Page 1: Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value). (Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).)
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 ↑ Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
 ↑ Pages 5–7: Quinzii, Martine (1992). Increasing returns and efficiency (Revised translation of (1988) Rendements croissants et efficacité economique. Paris: Editions du Centre National de la Recherche Scientifique ed.). New York: Oxford University Press. pp. viii+165. ISBN 0195065530.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
 ↑ Pages 106, 110–137, 172, and 248: Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
 ↑ Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
Starrett discusses non‑convexities in his textbook on public economics (pages 33, 43, 48, 56, 70–72, 82, 147, and 234–236): Starrett, David A. (1988). Foundations of public economics. Cambridge economic handbooks. Cambridge: Cambridge University Press.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
 ↑ Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
 ↑ Page 270: Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value). (Originally published as Drèze, Jacques H. (1974). "Investment under private ownership: Optimality, equilibrium and stability". In Drèze, J. H. Allocation under Uncertainty: Equilibrium and Optimality. New York: Wiley. pp. 129–165.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>)
 ↑ Page 371: Magill, Michael; Quinzii, Martine (1996). "6 Production in a finance economy, Section 31 Partnerships". The Theory of incomplete markets. Cambridge, Massachusetts: MIT Press. pp. 329–425.<templatestyles src="Module:Citation/CS1/styles.css"></templatestyles>
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 ↑ Lua error in Module:Citation/CS1/Identifiers at line 47: attempt to index field 'wikibase' (a nil value).
 ↑ Chapter 8 "Applications to economics", especially Section 8.5.3 "Enter nonconvexity" (and the remainder of the chapter), particularly page 495:
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References
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 Convex hulls
 Convex geometry
 Mathematical and quantitative methods (economics)
 Mathematical economics
 General equilibrium and disequilibrium
 Convexity in economics