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  • Print publication year: 2005
  • Online publication date: July 2010

3 - The Analysis of Consumer Demand

Summary

INTRODUCTION

This chapter deals with the analysis of consumer demand. The model of the household developed in Chapter 2 is used to examine the effects of several types of changes in the economic environment on the household's demand for a good. The discussion is suggestive rather than exhaustive, with the possibilities for analysis and application being very large. Beginning with an analysis of income effects, the chapter progresses to a discussion of price effects and then to analyses of several applications depicting several different price schemes with which consumers are commonly faced. Finally, the effects of preferences on demand are discussed.

The discussion is couched in terms of hypothetical experiments. The model of the household is observed in equilibrium given an initial set of conditions (e.g., income, prices, and preferences). Then a change in one of these conditions (e.g., income) is introduced and the model altered to include the change. The model's new equilibrium is found and compared with the initial equilibrium. The comparison of the prechange and postchange equilibria leads to conclusions about how the change affected the equilibrium combinations of goods demanded by the modeled household. The conclusions become hypotheses as to how typical households' demands for the good in question would change given a change in the factor (e.g., income, price) being analyzed. Finally, the findings from a few empirical economic studies are reported to give the flavor of the actual demand behavior of households in response to the changes in the conditions discussed.