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I think the lecturer has many good points, but he spends much to much time debunking neoclassical theories rather than expound upon what actually happens in the market within his theories.
No discussion of conditions required to add up individual downward-sloping demand curves and get market demand curves that also slope down.
Sloman and Norris (2002) Macroeconomics 2nd Edition. Page 45 under the heading “The Demand Curve” discusses how the market demand curve “is arrived at via adding up total demand of all consumers in the market for any given price”.
Paul Samuelson & Willain Nordhaus 2010 Microeconomic 19th Edition Page 48. “The market demand curve is found by adding together the quantities demanded by all individuals at each price. Does the market demand curve obey tha law of downward-sloping demand? IT certainly does. If prices drop the lower prices attract new customers through the substitution effect. In addition a price reduction will induce extra purchases of goods by existing consumers through both the income and the substitution effects. Conversely a rise in the price of a good will cause some of us to buy less. It certainly does statement provably false.
Samuelson’s logic in research paper defies belief: Starts by admitting problem: Defense do we make when challenged on the use of community indifference curves for a country or group of individual?
We may claim that our country is inhabited by a number of identical individuals with identical tastes. They must also have identical initial endowments of goods if this artifice of examining what happens to the representative individual’s indifference curves is to give us a ture description of the resulting market equilibrium. This case too is not vey realistic, though it may seem a slight improvement over Robinson Crusoe (Samuelson 1956 p. 3)
Then claims that a family’s indifference map can be derived: since blood is thicker than water the preferences of the different members are interrelated by what might be called a consensus or social welfare function which takes into account the deservingness or ethical worths of the consumption levels of each of the members.
The family acts as if it were maximizing their joint welfare function. Income must always be reallocated among the members of our family society so as to keep the marginal social significance of every dollar equal. (Samuelson 1956 pp 10 -11)
Then he assumes the economy is a hppy family! The same argument will apply to all of society if optimal reallocations of income can be assumed to keep the ethical woth of each person’s marginal dollar equal. A rigorous proof is given that the newly defined social or community indifference contours have the regularity properties of ordinary individual preference contours (Samuelson 1956 pa 21)
What? America is “one big happy family”??
What was he smoking? PhD textbooks repeat this nonsense: Mas-Colell Microenconomoic Theory 1995.
When can we compute meaningful measures of aggregatewelfare using the welfare measurement techniques for individual consumers? P 116)
When there is a fictional individual whose utility maximization problem when facing society’s budget set would generate the economy’s aggregate demand function (p. 116). There must also exist a social welfare function which accurately expresses society’s judgements on how individual utilities have to be compared to produce an ordering of possible social outcomes. We also assume that social welfare functions are increasing, concave, and whenever convenient, [email protected] (p. 117).
Let us now hypothesize that there is a process a benevolent central authority perhaps that for any given prices p and aggregate wealth function w, redistributes wealth in order to maximize social welfare (p. 117). So to get a downward-sloping demand he assumes that a benevolent central authority redistributes income so that everyone is happy before trade takes place. Reproduces Samuelson’s madness of the USA is one big happy family without realizing it’s mad.
W, Bruce Allen, Keith Weogelt, Neil D & Edwin < 2009, Managerial Economics: Theory , application and Cases 7th Edition p.. 83- 85. Think of the market demand curve as representing the sum of tastes and preferences of individual consumers. It summarizes the demand curves of all individuals in the market. To derive the market demand curve we estimate the horizontal sum of all individual demand curves. At each pricing point we estimate the market total by summing the purchases of all individuals at that price.
So rather than recognising problem most neoclassical economists normally don’t know of this problem or interpret it in off with the Fairies wa. The necessary and sufficient condition quoted above is intuitively reasonable. It says in effect that an extra unit of purchasing power should be spent in the same way no matte to whom it is give. (Gorman 1953). Continue teaching micro as if it’s valid. Assume that entire macroeconomy can be modeled as a representative agent.
Unfortunately the aggregate demand function will in general possess no interesting properties. The neoclassical theory of the consumer places no restrictions on aggregate behavior in general. (Varian 1992). Unless we suppose that all individual consumer’s indirect utility functions take the Gorman form where the marginal propensity to consume good j is independent of the level of income of any consumer and also constant across consumers. This demand function can in fact be rationalized by a representative consumer (Varian 1992).
Kirman shows representative agent misrepresents even 2 people..Two individuals with different indifference curves. A puts bundle Xa on higher indifference curve than Ya. B puts bundle Xb on higher indifference curve than Yb. Combined agent makes same aggregate choices. But representative agent prefers Y to X.
Less complicated example than Kirman’s still shows representative agent can’t represent more than 1 person. Red agent prefers its Shopping Trolley 1 to 2. Blue agent prefers Trolley 2 to 1. Composite RA prefers composite Trolley 2 to 1. Can’t represent even 2 people as compoite agent. Yet Representative Agent Macroeconomic treats whole economy as a single agent.
Individuals can’t be utility-maximisers. Indifference curves from which individual demand curve is derived don’t exist. Even if they did, market demand curve won’t be necessarily downward sloping. So what about the supply curve? More bad news but first the world according to Mankiw’s Mircoeconomics. The economic goal of the firm is to maximize profits.
Monoply is the sole producer; has a downward-sloping demand curve; is a price maker; reduces price to increase sales; Competitive firm is one of many producers; has a horizontal demand curve; is a price taker; sells as much or as little at same price; The goal of a competitive firm is to maximize profit. This means that the firm will want to produce the quantity that maximizes the difference between total revenue and total cost. A monopolist’s marginal revenue is always less than the price of it good. The demand curve is downward sloping. When a monopoly drops the price to sell one more unit the revenue received from previously sold units also decreases.
Profit equals total revenue minus total costs: Profits = TR – TC; Profit = (TR/Q – TC/Q) x Q; Profit = (P – ATC) x Q;
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