The demand for various commodities by individuals is generally thought of as the outcome of a utility-maximizing process. The interpretation of this relationship between price and quantity demanded of a given good is that, given all the other goods and constraints, this set of choices is that one which makes the consumer happiest.

Aggregate, or market, demand curves represent the sum of these individual demand curves. An important question is whether market demand curves can also be thought of as being generated by a utility-maximization process. Does the aggregated demand curve show how to optimise the total utility (happiness) of society? Does it show how to optimise something else? The answer to these questions is no; market demand curves generally have no utility interpretation. A social welfare function, in welfare economics, is a function which gives a measure of the material welfare of society, given a number of economic variables as inputs. ...

Moreover, even if market demand curves could mathematically be rationalized by a utility function; they still cannot be economically rationalized as generating an overall welfare index. There are several reasons for this

1. Each person's individual total utility gleaned from purchases depends on the size of his or her budget, but the distribution of wealth (and thus her budget) is a separate (free) variable in the aggregation. In other words, changing the distribution of wealth (such as giving needy people more resources) will produce a different total for society's utility.
2. Each person's demand curve is a function of his or her budget, so that if the distribution of wealth changes (by changing the distribution of prices and thus salaries, and so on), all of the individual demand curves change. The aggregate effect of such a change is not simple unless all the consumers have wealth-independent consumption patterns --- that is, unless the pauper and the billionaire spend the same fraction of their budgets on each item.

Markets cannot be claimed to select an optimum in the sense of the greatest total utility of society; indeed, there is not even general agreement on how total utility should be defined. However, under strictly competitive conditions, market outcomes do represent a Pareto optimum. Distribution of wealth - Wikipedia /**/ @import /skins-1. ... Pareto efficiency, or Pareto optimality, is a central concept in game theory with broad applications in economics, engineering and the social sciences. ...

It has been known since at least 1953 (Gorman, W.M., Community Preference Fields, Econometrica, 21: 63-80) and 1982 (Shafer, W. and Sonnenschein, H., Market demand and excess demand functions, in K. J. Arrow and M. D. Intriligator (eds), Handbook of Mathematical Economics (Vol. II), North-Holland, Amsterdam) that no reasonable assumptions can circumvent these problems. 1953 is a common year starting on Thursday. ... 1982 is a common year starting on Friday of the Gregorian calendar. ...

Scarcity is a central concept in economics. ... Opportunity cost is a term used in economics, to mean the cost of something in terms of an opportunity foregone (and the benefits that could be received from that opportunity), or the most valuable foregone alternative. ... The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... In economics, elasticity is the ratio of the incremental percentage change in one variable with respect to an incremental percentage change in another variable. ... The term surplus is used in economics for several related quantities. ... A economic shortage is a term describing a disparity between the demand for a product or service and its supply in a market. ... Consumer theory relates preferences, indifference curves and budget constraints to consumer demand curves. ... See also: record producer. ... In economics, the main criteria by which one can distinguish between different market forms are: the number and size of producers and consumers on the market, the type of goods and services being traded, and the degree to which information can flow freely. ... Welfare economics is a branch of economics that uses microeconomic techniques to simultaneously determine the allocational efficiency of a macroeconomy and the income distribution consequences associated with it. ... In economics, a market failure is a situation in which markets do not efficiently organize production or allocate goods and services to consumers (for example, a failure to allocate goods in a way some see as socially or morally preferable). ...