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Demand Theory for Poverty and Affluence: A Contribution to Utility Theory

MILLER, ANNE (2023): Demand Theory for Poverty and Affluence: A Contribution to Utility Theory.

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Van Praag (1968) developed a multiplicative utility function, based on 'leaning S-shaped, bounded cardinal utilities', comprising increasing marginal utility initially, representing 'deprivation' first, then diminishing marginal utility representing 'sufficiency'. A new separability rule, based on the satisfaction of human needs, suggests when to multiply and when to add utilities. A functional form is derived to explore the theoretical effects of adding two S-shaped bounded cardinal utilities, yielding both convex- and concave-to-the-origin indifference curves, the latter defining 'dysfunctional poverty'. The convex-to-the-origin indifference curves potentially provide all of superior-normal, inferior-normal and Giffen responses. Each derived structural form, including labour supply, manifests a discontinuity, an envelope curve and high elasticises associated with deprivation. This provides an integrating framework for analysing utility and demand where the emphasis is on people and the satisfaction of needs, with applications in: housing health services, education, wellbeing; poverty and inequality studies; tax and benefit policy analysis; and behavioural economics.

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