An Alternative Approach to the Concept of Demand: Comment

Abstract

In a recent article in this journal Robert Awh argued that the conventional treatment of demand arbitrarily overemphasizes the importance of the price-quantity relationship, compared with the attention usually given to other relevant variables (e.g., income, prices of related goods and tastes) [1], creating a misconception in the minds of beginning students that demand is simply a two-variable relationship. Professor Awh suggests, therefore, that the traditional concept of demand be replaced with a multivariable relationship, following the usual econometric practice. The first purpose of this comment is to suggest that Professor Awh has analyzed the concept of demand outside the conventional framework (i.e., as part of a model of price determination). Doing so makes us apt to lose sight of the unique role which price actually plays. In most textbooks (but admittedly not all) demand and supply functions are specified for the purpose of determining price. By combining the demand and supply functions for a good with the condition that the quantity demanded must equal the quantity supplied in equilibrium, we obtain the usual three-equation price-determination model. The structural equations in this type of model may either be deduced on purely theoretical grounds, or they may be empirically derived through the use of econometric methods. In either case, within the context of a model, the price of a given commodity can no longer be treated in the same manner in which we might want to treat the other independent variables in the structural equations. For example, price may be treated as simply one of several independent variables with respect to a given demand function, but price is an endogenous variable with respect to the model. Thus, whereas we might find it useful to consider the effect of an exogenous change in, say, income on the quantity demanded (and price), we are unable to consider changes in price in the same manner. Hence, a decision on the part of an author to treat the concept of demand as part of a price-determination model may, I believe, justify emphasizing the price-quantity relationship on grounds that are not wholly arbitrary. Second, replacing the conventional (theoretical) concept of demand with a multivariate relationship may cause us to lose sight of the differences between theoretical demand functions and empirical demand functions. It can be argued that these differences are significant and that it is better to preserve them than to suppress both types of functions under one new heading-multivariate relationships. Theoretical demand functions are derived deductively from presupposed utility functions, relative prices and income constraints. Because the methods are deductivebecause the demand functions are inferred from certain basic premises or assumptions concerning tastes, prices and income, the theoretician need not concern himself with the problem of specification (i.e., the problem of including all, and only all of the relevant variables in the demand equation). In short, the relevant variables have been presupposed and, therefore, logically follow from the assumptions. Empirical demand functions, on the other hand, are derived inductively. Beginning with statistical observations on prices and quantities the econometrician must determine whether or not the structural equations of his model are properly specified. Usually this means that he must know if it is possible to identify the structural parameters of his model (e.g., the parameters of his demand equation) from estimates of the parameters of