Applied consumption analysis

344 Pages·1990·15.689 MB·English

by  Phlips, Louis

APPLIED CONSUMPTION ANALYSIS
REVISED AND ENLARGED EDITION
ADVANCED TEXTBOOKS
IN ECONOMICS
VOLUME 5
Editors:
C.J. BLISS
M.D. INTRILIGATOR
Advisory Editors:
D.W. JORGENSON
M.C. KEMP
J.-J. LAFFONT
J.-F. RICHARD
NORTH-HOLLAND
AMSTERDAM · NEW YORK · OXFORD · TOKYO
APPLIED CONSUMPTION
ANALYSIS
REVISED AND ENLARGED EDITION
LOUIS PHLIPS
C.O.R.E.
NORTH-HOLLAND
AMSTERDAM · NEW YORK · OXFORD · TOKYO
ELSEVIER SCIENCE PUBLISHERS B.V.
Sara Burgerhartstraat 25
P.O. Box 211, 1000 AE Amsterdam, The Netherlands
Distributors for the United States and Canada:
ELSEVIER SCIENCE PUBLISHING COMPANY, INC.
655 Avenue of the Americas
New York, N.Y. 10010, U.S.A.
First edition: 1974
Revised edition: 1983
Second impression: 1990
Library of Congress Cataloging in Publication Data
Phlips, Louis.
Applied consumption in analysis.
(Advanced textbooks in economics; v. 5)
Bibliography: p.
Includes index.
1. Demand (Economic theory) 2. Consumption
(Economics) 3. Statics and dynamics (Social
sciences). I. Title. II. Series.
HB801.P47 1982 338.5'21 82-18834
ISBN 0-444-86531-4 (U.S.)
ISBN: 0 444 86531 4
© ELSEVIER SCIENCE PUBLISHERS B.V., 1983
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Printed in The Netherlands
Introduction to the series
The aim of the series is to cover topics in economics, mathematical economics
and econometrics, at a level suitable for graduate students or final year
undergraduates specializing in economics. There is at any time much
material that has become well established in journal papers and discussion
series which still awaits a clear, self-contained treatment that can easily be
mastered by students without considerable preparation or extra reading.
Leading specialists will be invited to contribute volumes to fill such gaps.
Primary emphasis will be placed on clarity, comprehensive coverage of
sensibly defined areas, and insight into fundamentals, but original ideas will
not be excluded. Certain volumes will therefore add to existing knowledge,
while others will serve as a means of communicating both known and new
ideas in a way that will inspire and attract students not already familiar
with the subject matter concerned.
The Editors
To Lucie
Preface
This is not a book on demand theory. Nor is it a book on the eco-
nometrics of demand systems. Rather, what I have tried to write is a
text on the subject matter between theory and estimation, that is on
the art of reformulating pure theory to make it suitable for econometric
applications. In my experience, it is not sufficient to offer a price theory
course and an econometrics course: most students find it very difficult
to bridge the gap between the two without appropriate training.
As in the art of piano playing, the art of consumption analysis requires
a lot of practising. That is why many exercises are offered to the reader
while only a few answers are given (for the more important ones). The
reader is strongly requested to work out all answers for himself. His
background is assumed to include some knowledge of calculus and of
elementary textbook economics. Purely econometric considerations
have been avoided. The starred sections are more advanced and some-
times require some matrix algebra: they can be used for a 'special
topics' course.
My intellectual debt to Hendrik S. Houthakker, one of the pioneers
in the field, should be obvious. His work on additive functions fascinated
me and is at the core of the static part of this book. His more recent
contributions, with Lester D. Taylor, to the dynamization of demand
systems provided the framework for my own work, which would never
have come from the ground without their help and encouragement.
I am most heavily indebted for research assistance and intellectual
support to E. de Souza, J. Garcia dos Santos, Ph. Rouzier, R. Sanz
Ferrer and D. Weiserbs, whose personal contributions have been
indicated - I hope - at the appropriate places in the next. The editors
of this Series, C. Bliss and M.D. Intriligator, offered many suggestions
and constructive criticism during the various stages of elaboration.
VII
VIII Preface
Thanks are also due to A.P. Barten and A. Deaton for comments on
the final manuscript.
Competent programming assistance was given by M. Vuylsteke-
Wauters over a number of years, and more recently by J.P. Lemaître.
Ph. Rouzier and P. Rousseaux. Last but not least, I wish to thank
B. de Schaetzen, B. de Rochelée and F. De Beir for cheerful secretarial
assistance.
De Haan, July 1973 LOUIS PHLIPS
Preface to the second edition
This second edition is also an enlarged one. Part I now offers a brief
discussion of duality and flexible forms, in particular of Deaton and
Muellbauer's 'almost ideal demand system'. There is also an introduction to
Muellbauer's treatment of the 'aggregation problem'. Part II includes my
work on the demand for leisure and money and on true wage indexes (a new
Chapter X). The second half of the final chapter, on intertemporal utility
maximization, is completely rewritten and largely draws from my work with
Frans Spinnewyn. Throughout, I have done my best to update the refer-
ences. The list of references now extends till 1981.
I wish to thank Simone Clemhout, Wouter Keller, Wilhelm Krelle,
A. H. Q. M. Merkies and Ricardo Sanz-Ferrer for pointing out errors in the
first edition.
After correcting a distressingly large number of printing errors, Γ11 bet
none appear in this edition. Or am I too optimistic?
De Haan, April 1982 LOUIS PHLIPS
Contents
Introduction to the series V
Preface VII
Preface to the second edition VIII
PART I: STATICS
Chapter I. Utility functions 3
1.1. Basic axioms on the preference relation 4
1.2. Additional axioms 8
1.3. Ordinalism versus cardinalism 11
1.4. Maximization of the utility function 16
1.5. Indirect utility functions 27
Chapter II. Demand functions: general restrictions 32
2.1. Homogeneity of degree zero 34
2.2. Adding-up 38
2.3. The Slutsky equation: an intuitive approach 40
2.4.* The fundamental matrix equation 47
2.5. Concluding remarks: evidence and significance 53
Chapter III. Demand functions: particular restrictions 57
3.1. Additive utility functions 57
3.2. Separable utility functions 66
3.3. Conditional demand functions and the implications of separable utility 72
3.4.* The structure of preferences: substitution, complementarity and independence 77
3.5. Homothetic utility functions 86
Chapter IV. Empirical implementations 91
4.1. Economic theory and empirical analysis 92
4.1.1. Theoretical plausibility 93
4.1.2. Identification 94
4.1.3. Ceteris paribus 96
4.1.4. Aggregation over individuals 98
IX