Demand Theory

‘Demand theory is only a theory; it has no validity in the real world.’ Explain whether you agree with this statement.

(Ariely, Loewenstein and Prelec, n.d) presented a concept they termed as coherent arbitrariness which was shown to have two aspects: coherence whereby consumers respond to changes in relevant variables, e.g. price, in a sensible, coherent fashion, however they are doing so around a prescribed arbitrary base value. Through the completion of six experiments they showed how even after receiving complete information on the potential purchases, ‘absolute valuation of experience goods is surprisingly arbitrary.’ This was found through the use of arbitrary anchors that distorted the subjects’ ability to objectively value a given offering. This anchor then presented a norm for future offerings to be measured against meaning this effect didn’t recede through gained purchasing experience of the offering. Hence, the value a student gave to a certain product bore little resemblance to the true value of the product leading the researchers to conclude that consumers are not necessarily very good at predicting the pleasures or pain produced by a purchase. Seeing as these predictions are the basis of how a consumer decides how much they would pay for a certain offering, it doesn’t put much faith in the value the consumer arrives at being close to the true value. However, the experiments also showed the consumers’ ability to order relative valuations of different amounts of the good which is consistent with demand curves derived from fundamental preferences. The findings of the paper left the idea of demand theory validity in the real world rather weakened as the subject’s valuations of true preferences could be so easily distorted through the use of arbitrary anchors. The consumer’s choices failed to reflect their true preferences and hence the whole concept of how demand theory explains the establishment of demand for a good in real world markets is...