Kelvin Lancaster

Who was Kelvin Lancaster?

Kelvin John Lancaster was a mathematical economist and John Bates Clark professor of economics at Columbia University. He is best known for the development of the Theory of the Second Best with Richard Lipsey. Lancaster was also active in developing the calculus of qualitative economics, formulating the household production function, and applying the hedonic model to the estimation of the price of houses.

In a 1966 paper, Lancaster developed what he called a "new theory of consumer demand", in which the then standard microeconomic demand theory was modified by stipulating that what consumers are seeking to acquire is not goods themselves but the characteristics they contain. This theory provides a convenient account of the difference between less developed consumption economies, in which there are fewer goods than characteristics, and more developed consumption economies, in which there are more goods than characteristics, so that consumers can secure any combination of characteristics they desire, subject only to budget constraints. It also provides a way of predicting demand for new commodities, so long as they do not embody any new characteristics.