Kakutani Fixed Point Theorem
1. Background
The Kakutani Fixed Point Theorem, introduced by Shizuo
Kakutani in 1941, is a key result in mathematical
economics. It generalizes Brouwer’s Fixed Point
Theorem to set-valued functions, which are essential in
economic models involving choices, preferences, and
constraints. This theorem provides a rigorous
foundation for proving the existence of equilibrium in
various systems, especially market economies.
Real-Life Example:In housing markets, individuals have
a range of preferences (location, size, cost). The set of
housing demands is not a single option but a set of
choices. Kakutani’s theorem helps prove that an
equilibrium exists where everyone’s housing
preferences and market constraints balance out.
2. Overview in Economics
equilibrium In economics, Kakutani’s Fixed Point
Theorem is a powerful tool used to prove the existence
of in market economies. It states that if certain
mathematical conditions are met, there exists at least
one point—a combination of prices—at which supply
equals demand across all markets.
In Simpler Terms:Imagine a market where prices can
change. Kakutani’s theorem guarantees that there’s a
price level at which the quantity demanded by buyers
equals the quantity supplied by sellers. This is called the
equilibrium price.
Why It’s Important:
Foundation of General Equilibrium Theory:It is
core to models like Arrow-Debreu, which analyze
how prices and allocations balance in an entire
economy.
o Real-Life Example:In stock markets, investors
make decisions based on returns. Kakutani’s
theorem helps prove that a balance of buyer
and seller strategies can exist.
Understanding Market Dynamics:It helps
economists study how different variables interact
to stabilize or destabilize markets.
o Real-Life Example:When oil prices fluctuate,
market forces adjust supply/demand. The
theorem ensures a point of balance will exist
again.
Policy Relevance:It supports the design and
evaluation of government interventions by
ensuring that equilibria exist under certain
conditions.
o Real-Life Example:Minimum wage laws affect
labor markets, and Kakutani’s theorem helps
economists model the new equilibrium in
employment.
3. Theorem Statement
Let ( X ) be a non-empty, compact, and convex set, and
let ( T ) be a correspondence (set-valued function). If:
1. ( T(x) ) is non-empty, convex, and compact for all ( x
\in X )
2. ( T ) is upper hemicontinuous
Then there exists a fixed point ( x^* ) such that ( x^* \in
T(x^*) ).
Real-Life Example:In a job market with multiple
qualifications and preferences, a fixed point means
there's at least one wage level and job assignment
combination where workers are satisfied and firms fill
their vacancies.
4. Key Economic Application Elements
Set:Represents all possible price vectors in an
economy.
Real-Life Example:In grocery retail, different stores set
various prices for bread, milk, etc. The complete set of
these combinations forms the price vector space.
Correspondence:Maps each price vector to the set
of optimal responses.
Real-Life Example:A bakery adjusts production based on
flour and electricity prices, forming a set of outputs at
given inputs.
Conditions on ( T ):Must be upper semi-continuous
and map each point to a non-empty, convex, and
closed set.
Real-Life Example:In farming, crop production responds
to continuous land and price conditions, satisfying upper
semi-continuity.
5. Step-by-Step Example (Simplified)
Step 1: Domain
Let ( X ) be the set of all price combinations
(compact, convex).
Real-Life Example:An online marketplace like Amazon
evaluates a limited range of price vectors for
profitability and customer satisfaction.
Step 2: Correspondence
Define ( T ) to include all optimal choices (e.g.,
demand = supply).
Real-Life Example:An airline's pricing model considers
fuel costs and ticket demand to define feasible price
options.
Step 3: Conditions
( T ) is convex, closed, and non-empty; ( T ) is upper
hemicontinuous.
Real-Life Example:Utility companies select pricing plans
that don’t drastically change due to small shifts in costs.
Step 4: Conclusion
By Kakutani’s theorem, a fixed point exists: A price
vector where all markets clear (demand = supply).
Real-Life Example:In farmer markets, there’s usually
one price where buyers and sellers agree without
intervention.
6. Proof Sketch
1) Approximate the correspondence with single-
valued continuous functions.
2) Apply Brouwer’s theorem to each approximation.
3) Use compactness to extract a converging sequence.
4) Prove the limit satisfies the original conditions.
Real-Life Example:In project management, iterative task
choices adapt based on group decisions, converging to a
stable allocation — akin to reaching a fixed point.
7. Applications
Kakutani’s Fixed Point Theorem has wide applications in
economics and beyond. Here's how it applies in real-
world contexts:
1. General Equilibrium Theory (Economics)
o Use: Proving prices where all markets are in
equilibrium.
Real-Life Example:Prices adjust in national
economies to balance supply and demand.
2. Game Theory (Nash Equilibrium)
o Use: Proving stable pricing strategies in
oligopolies.
Real-Life Example:Telecom companies adjust
based on competitors’ actions.
3. Control Systems and Optimization
o Use: Analyzing uncertain outcomes in AI
algorithms.
Real-Life Example:Self-driving cars utilize optimal
driving policies.
4. Mathematical Modeling of Policies
o Use: Analyzing policy impacts on market
equilibrium.
Real-Life Example:Carbon tax policy generates a
new equilibrium in carbon permit markets.
8. Merits
1. Generalizes Brouwer's Theorem:Handles multi-
valued situations that Brouwer’s theorem cannot.
2. Applicable to Complex Real-World Economic
Models:Proves equilibrium in non-linear, uncertain
markets.
3. Supports Modern Game Theory & Policy
Modeling:Central to proving Nash equilibria and
validating models in global trade.
4. Powerful Tool in Theoretical and Applied
Economics:Foundational in advanced economic
studies.
9. Demerits
1. Only Guarantees Existence, Not Construction:It
proves a solution exists but doesn't indicate how to
find it.
2. Requires Strict Mathematical
Assumptions:Assumptions such as convexity may
not always be present in real data.
3. High-Dimensional or Abstract Models are Hard to
Visualize:The equilibrium may be difficult to
interpret or apply in complex scenarios.
4. Doesn’t Ensure Uniqueness or Stability:Multiple
fixed points may exist; stability under changes isn't
guaranteed.
