Basic Knowledge for Market Principle: Approaches to the Price Coordination Mechanism by Using Optimization Theory and Algorithm

Abstract

On the basis of market fundamentalism, new types of social systems with the market mechanism such as electricity trading markets and carbon dioxide (CO₂) emission trading markets have been developed. However, there are few textbooks in science and technology which present the explanation that Lagrange multipliers can be interpreted as market prices. This tutorial paper explains that (1) the steepest descent method for dual problems in optimization, and (2) Gauss-Seidel method for solving the stationary conditions of Lagrange problems with market principles, can formulate the mechanism of market pricing, which works even in the information-oriented modern society. The authors expect readers to acquire basic knowledge on optimization theory and algorithms related to economics and to utilize them for designing the mechanism of more complicated markets.