Effect Structure and Thermodynamics Formulation of Demand-side Economics

TL;DR

This paper introduces a thermodynamics-inspired framework for demand-side economics, defining new concepts like effect structure, generalized utility, and consumer surplus, and classifying EoS into three classes.

Contribution

It formulates an equation of state for demand-side economics, establishing formal analogies with thermodynamics and proposing new economic quantities and classifications.

Findings

Identified manifold space of thermodynamics in demand economics

Defined new quantities like total wealth and generalized utility

Proposed econometric modeling of consumer EoS

Abstract

We propose concept of equation of state (EoS) effect structure in form of diagrams and rules. This concept helps justifying EoS status of an empirical relation. We apply the concept to closed system of consumers and we are able to formulate its EoS. According to the new concept, EoS are classified into three classes. Manifold space of thermodynamics formulation of demand-side economics is identified. Formal analogies of thermodynamics and economics consumers' system are made. New quantities such as total wealth, generalized utility and generalized consumer surplus are defined. Microeconomics' concept of consumer surplus is criticized and replaced with generalized consumer surplus. Smith's law of demand is included in our new paradigm as a specific case resembling isothermal process. Absolute zero temperature state resembles the nirvana state in Buddhism philosophy. Econometric modelling of consumers' EoS is proposed at last.