A Theory of Demand Based on Essential and Inessential Goods

Abstract

Needs and wants offer a simple, consistent and intuitive foundation for demand. Indifference curves for essential goods bend sharply as use approaches zero because no amount of any other good may substitute for the essential. The sharp curvature implies inelastic demand and gross complementarity with most other goods. Indifference curves for inessentials bend less implying elastic demand and gross substitutability with most other goods. Monopoly theories that depend on elastic demand rule out essential goods. Given the importance of monopolies of life saving drugs, we believe a new monopoly theory, based on the dictator game, will prove valuable.