The Confusing Link between Utility and Demand
8 Pages Posted: 28 Jun 2014 Last revised: 26 Aug 2014
Date Written: June 26, 2014
Abstract
This paper proves that utility theory derives inconsistent, ambiguous and wrong demand function. Instead, it proves that if a product is contributing to utility or profit, the relation with its price must be positive, and that the proper demand relation is one between a burdening product and its price.
When Walras (1874/1954) derives his general equilibrium theory, he uses a demand curve as the starting point. To retrace the demand curve, he invokes the utility theory. Marshall (1907/1948) uses marginal utility to derive his demand curve and consumers’ surplus, and the price associated with the marginal utility is called willingness to pay. Although many people (Kenneth J. Arrow, 1950, William J. Baumol, 1946, Charles Kennedy, 1963, G.H. Kramer, 1973, Ian Malcolm David Little, 1957, Dennis Mueller, 1979, Lionel Robbins, 1938, Paul A. Samuelson, 1956) have objected utility theory, using it to derive the law of demand seems the only way out. This paper will prove that such derived result may not look like a demand function, and will offer an alternative theory to reveal that the relation between a benefiting, or utility enhancing, product and its price is actually positive.
Keywords: Utility, Demand, Supply
JEL Classification: B13
Suggested Citation: Suggested Citation