Thursday, November 6, 2014

Microeconomics, From Physical to Metaphysical

Here is another in my continuing series of snippets from my class in cost-benefit analysis.

The prices and quantities actually traded are visible or nearly so.

The price elasticity of demand at the current market price is one degree removed from immediate visibility; it requires only a pair price/quantity points that occur in what you’re willing to accept as the same market at the (nearly) same time.

The demand curve is not visible, despite how often you see these curves in textbooks.  It can be estimated from visible market data with some additional assumptions about functional form, or from surveys conditional on the extent to which they are thought to reflect real potential market behavior.  It can be validated ex post for prices actually offered in markets.

Utility is not visible, nor can imputations of it be validated in any conceivable way.  It can be contradicted (and is) by measured subjective well-being, but this just means that MSWB is not the same as utility.  Utility has the same scientific stature as the soul.

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