Friday, March 9, 2012

The "Law" of Demand?

Has anyone really stopped to critically examine the idea of the "Law of Demand"?  Now we are not asking about questioning that there seems to exist an inverse relationship between price and quantity, ceteris paribus.  No, we are asking about the axiomatic foundations from which the "Law of Demand" arises.
For example, one of the more fundamental assumptions about human behavior is that of the independence of economic agents.  The independence assumption states, basically, that economic agents are not influenced by other economic agents; there is never any behavior in which a person buys something simply because someone else has that same thing, there is no "keeping up with the Jones".  To have economic agents who are socially embedded, who exhibit relational behavior violates the independence assumption which is fundamental to the "Law of Demand" having any validity.
Consider also how economists view the preferences of economic agents.  The "preference ordering" of a set of consumption possibilities is assumed to be
  1. complete: i.e. consumers can rank all possible combinations of all possible goods, 
  2. transitive: that is, if A is preferred to B and B is preferred to C, then it must always hold that A is preferred to C, and
  3. convex: this is a mathematical concept that says, more or less, that a consumer is willing to obtain more and more of good A if and only if it involves giving up less and less of some other good.
A fourth assumption exists that deals with how much an economic agent wants of any good, and that assumption is that more is always preferred to less, that non-satiation is the rule.  There is never a time when an economic agent can have enough of any good.

Now the "Law of Demand" exists as a scientific law only if all four of these assumptions are met.  Should any one of these assumptions not be true, the law of demand collapses and loses its scientific creditability. 

So if the general behavior of people is such that they make their purchases based upon habit because they cannot really take the time to evaluate and rank all possibilities, if there are some goods which they purchase even if required to give up more and more of other desirable goods, it there are individuals out there who are happy with what they have and simply do not care to buy more of something they like and can afford, then the idea that there is a "Law of Demand" has to be seriously questioned.  Or even discarded. 

Think on these things.

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