AGEC 635 Powerpoint Slides 169 on

AGEC 635 Powerpoint Slides 169 on - Generalizations to...

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1 Generalizations to Complete Demand Systems (1) Socio-Demographic Variables The treatment of demographic effects in the context of demand systems dates from Barten (1964) and more recently from Parks and Barten; Lau, Lin, and Yotopoulos; Muellbauer; and Pollak and Wales (1978, 1980, 1981). Pollak and Wales (1981) describe for general procedures for incorporating demographic variables into demand systems: (1) Demographic Translating (2) Demographic Scaling (3) Gorman and Reverse Gorman Specifications (4) The Modified Prais-Houthakker Procedure Other ways of handling the problem of incorporating these types of variables – a set of separate demand relationships can be estimated for each of the demographic variables of interest. From a practical viewpoint, this method is usually not possible because of data limitations. Further, the demographic variables may be incorporated into the utility function and thus will appear in the equations of the complete demand system.
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2 Advanced by Lau, Lin, and Yotopoulos, and Parks and Barten, stipulates embedding these variables, either continuous or discrete, into the direct or indirect utility function. Each a i , i = 1, …, r reflects one dimension of the r household characteristics. The demand functions which arise then depend on the vector of socioeconomic and demographic factors, (a 1 , …, a r ). In short, these researchers specify a complete utility maximization model for the consumption behavior of households which takes into account the effects of differential composition of the households in a general way. (2) Dynamic Complete Demand System --Use of a state adjustment model in which quantities purchased depend on existing stocks of either physical stocks of goods or psychological stocks of habits --Use a dynamic utility function (Phlips) --Cast the problem into a control theory framework in which the consumer is attempting to maximize a discounted utility function subject to wealth and stocks constraints. Application of state adjustment model –Green, Hassan, Johnson; Houthakker, Taylor ) ,..., , , ,..., ( OR ) ,..., , ,..., ( 1 1 1 1 r n r n a a y p p a a q q U U Ψ = Ψ =
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3 Usefulness of Complete Demand Systems (1) The generation of a massive volume of empirical results consistent with the theory of consumer behavior (2) Information to test hypotheses about postulates & restrictions directly obtainable from the theory The voluminous results depend on the specific functional forms and the particular aggregate consumption categories and specific individual goods being analyzed. Complete demand systems usually generate estimates of all own-price elasticities, marginal budget shares of all aggregate consumption categories and individual goods, and all Slutsky or income compensated own-price and cross-price elasticities. In addition to the above parameter estimates, the additive complete demand systems provide estimates of welfare indicators such as income flexibilities and the marginal utility of money. The extended linear expenditure system (ELES) as developed by
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This note was uploaded on 12/09/2011 for the course STATS 221 taught by Professor Nielson during the Fall '10 term at BYU.

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AGEC 635 Powerpoint Slides 169 on - Generalizations to...

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