The Strong Law of Demand

13 Pages Posted: 17 Feb 2003

See all articles by Donald Brown

Donald Brown

Yale University - Cowles Foundation

Caterina Calsamiglia

Yale University - Department of Economics

Date Written: February 2003

Abstract

We show that a demand function is derived from maximizing a quasilinear utility function subject to a budget constraint if and only if the demand function is cyclically monotone. On finite data sets consisting of pairs of market prices and consumption vectors, this result is equivalent to a solution of the Afriat inequalities where all the marginal utilities of income are equal.

We explore the implications of these results for maximization of a random quasilinear utility function subject to a budget constraint and for representative agent general equilibrium models.

The duality theory for cyclically monotone demand is developed using the Legendre-Fenchel transform. In this setting, a consumer's surplus is measured by the conjugate of her utility function.

Keywords: Permanent Income Hypothesis, Afriat's Theorem, Law of Demand, Consumer's Surplus, Testable Restrictions

JEL Classification: D11, D12, D51

Suggested Citation

Brown, Donald J. and Calsamiglia, Caterina, The Strong Law of Demand (February 2003). Available at SSRN: https://ssrn.com/abstract=379520

Donald J. Brown (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Caterina Calsamiglia

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

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