The Economic Theory of the Consumer

TLDR: In this paper, the authors set out the theory of the utility-maximizing consumer and the derivation of the demand equations, including the direct specification of the functional form of demand equations.

Abstract: The demand function for a single commodity explains how changes in income and the prices of all goods affect the quantity consumed of that commodity. The objective of consumption theory is to derive testable hypotheses about the demand functions. These hypotheses take the form of theoretical restrictions on the demand functions, for example, demand homogeneity, Slutsky symmetry, etc. These restrictions come from the utility-maximizing theory of consumer behaviour. Consequently, the objective of this chapter is to set out the theory of the utility-maximizing consumer and the derivation of the demand equations. There are a number of ways of deriving demand equations, including (i) the direct specification of the functional form of the demand equations; (ii) the specification of the direct utility function; (iii) the specification of the indirect utility function; (iv) the specification of the cost function; and (v) the application of the differential approach.