Economics Stack Exchange Archive

What happens to aggregate demand curve when the weak axiom is invalid?

• posted by: CarrKnight on 2011-10-20
• tagged: demand, microeconomics
• score: 6

I use Mas-Colell (the bible) for this as the reference.

Take well-behaved individual demand functions that respect the weak axiom(WA). A well known result (chapter 4) is that the resulting aggregate demand might NOT respect such axiom. This would mean that, in aggregate, for some combinations of wages and prices society might choose A over B while for other combinations B over A.

But what are the actual effects of this?
What does it tell us about the aggregate demand curve?

• Is the aggregate demand curve still defined?
• Is the aggregate demand curve still downward sloping?
• Does the representative consumer method still work? Would it have to have a demand that doesn’t respect WA?

It seems to me like a big deal, but I never see any comment in the modern literature. Is it just assumed away?

Answer 296

• posted by: Zermelo on 2011-10-21
• score: 2

This is an interesting question, something I used to know the full answer to. Right now, I can answer (3) for you. The representative agent does not work under anything but the most restrictive assumptions. In fact, it is possible that individual preferences are well-behaved, EVERY individual prefers A to B, but the representative agent prefers B to A (Kirman 1992 provides an example).

What are the assumptions under which the representative agent does work? I think the least restrictive assumption is the so-called Gorman form, a type of additive separability of utilities. Google “Gorman aggregation” + “representative agent” and you should get a bunch of interesting papers.

Bottomline: Micro theory is very clear on this. Most macro models (especially RBC and DSGE models) have no justifiable microfoundations.

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