User:Jgard5000/Article 1
Aggregate Consumer Demand Curve
[edit]The aggregate consumer demand curve is the summation of the individual consumer demand curves. The aggregation process preserves only two characteristics of individdaul consumer prefereence theory continuity and homogeniety. Aggregation introduces three additional non price determinants of demand - (1) the number of consumers (2) "the distribution of tastes among the consumers" and (3) "the distribution of incomes among consumers of different taste." Thus if the population of consumers increases ceteris paribus the demand curve will shift out. If the proportion of consumers with a stong preference for a good increases certeris paribus the demand for the good will change. Finally if the diistributuo of income changes is favor of those consumer with a strong preference for the good in quesiton the demand will shift out. It is important to remember that factors that affect individual demand can also affect aggregate demand. However, net effects must be considered. For example, a good that is a complement for one person is not necessary a complement for another. Further the strength of the relationship would vary among persons.
Problems with Aggregation
[edit]Aggregating individual consumer demand curves presents several problems.
Independence Assumption
[edit]First to sum the demand functions it must be assumed that they are independent - that is that one consumer's demand decisions are not influenced by the decisions of another consumer. Example, A is asked how many pairs of shoes he would buy at a certain price. A says at that price i would be willing and able to buy 2 pairs of shoes. B is asked the same question and says 4 pairs. Questioner goes back to A and says B is willing to buy four pairs of shoes, what do you think about that? A says if B has any interest in those shoes then i have none. Or A, not to be outdone by B says then i'll buy five pairs. And on and on. This problem can be eliminated by assuming that the consumers tastes are fixed in the short run. This assumption can be expressed as assming that each consumer is an independent idiosyncratic decision maker. .
No interesting Properties
[edit]The second problem is more serious. As David Kreps note is his tezt, A Course in Microeconomic Theory (Princeton 1990), “...total demand will shift about as a function of how individual incomes are distributed even holding total (societal) income fixed. So it makes no sense to speak of aggregate demand as a function of price and societal income." Since any change in relative prices affects a redistribution of real income the result is that there is a separate demand curve for every relative price. Kreps goes on to say, "So what can we say about aggregate demand based on the hypothesis that individuals are preference/utility maximizers? Unless we are able to make strong assumptions about the distribution of preferences or income throughout the economy (everyone has the same homothetic preferences for example) there is little we can say. ..” The strong assumptions are that everyone has the same tastes and that each person’s taste remain the same as income changes so each additional income is spent exactly the same way as all previous dollars. As Keen notes the first assumption amounts to assuming that there is a single consumer the second that there is a single good. Kleen further states that the implications for traditional economics that you cannt draw conclusions anout social welfare, there is no invisible hand and Adam Smith was wrong. Varian, a leading expert on microeconomic analysis reaches a more muted conclusion, "The aggregate demand function will in general possess no interesting properties..." However Varian went on to say," the neoclassical theory of the consumer places no restriction on aggregate behavior in general." Among other things this means the preference conditions (with the possible exception of continuity) simply don't apply to the aggregate function.Jgard5000 (talk) 23:26, 3 October 2009 (UTC)jgard5000 Does this mean that a good portion of microeconomic analysis is worthless? No. It means that it is useful as an approximation of aggregate consumer behavior and nothing more.