Consumer Demand Theory: Concepts, Assumptions, and Market Systems

This essay delves into the core principles of consumer demand theory, examining how individuals allocate limited resources to maximize satisfaction. It explores key concepts such as utility theory, the law of diminishing returns, and the equimarginal principle, illustrating how these ideas shape co...Read More

Consumer
Demand Theory

 The premises of the consumer demand theory refers to the basis
upon which individuals act so as to subdivide their limited
resources amongst the merchandises that provide satisfaction to
the consumers.
 Human beings are basically required to make a decision
concerning what they will utilize based on the assets that are
there.
 Utility theory makes a suggestion that rational individuals in a
careful manner evaluate and consume the combination of goods
that creates the highest level of satisfaction given the resources
available.
 Basically, consumer demand theory is a principle that relates
the relationship between the consumer demand for goods and
services with their charges.

Concepts and Assumptions
 There exist a number of concepts which are the basis of the
fundamental principles of the consumer demand behavior.
 The law of marginal utility and law of diminishing returns
make a suggestion that a consumer gets less additional
value for each of the identical items that they get (Battalio
178).
 For example, the consumption of Kreme doughnuts are very
great for the very first few but consumption of more than
say six pieces probably makes a consumer worse than
having eaten none at all.
 According to the equimargarinal principle, the overall
optimum utility is attained when all last products consumed
contains the same marginal utility.

 one of the most unique concept that is used in
the consumer demand theory is the leisure
and optimal time allocation (Battalio 176).
 People will be faced with a dilemma on how to
allocate hours of work and leisure.
 This consideration is solved by consideration of
the utility gained in leisure and amount of
money gained if a person enjoying leisure
would be working at that particular time

 The latter concept is used since it is a fact that
every human being faces an equal number of
hours in a day.
 All hypothesis discussed add to the larger concept
of general supply and demand hypothesis.
 The consumer demand theory assumes that
consumers are rational and thus they strive to
maximize their utility.
 Research shows that human beings are irrational in
their deeds in most cases, they precisely act
irrationally.

 Build into the demand are factors like consumer
preferences, tastes, and choices.
 The evaluation demand in the overall economy is
an important move or any business that needs to
survive in the competitive market.
 Market systems are governed by the laws of
demand and supply which are the determining
factors of the prices of goods and services
(Lancaster 45).
 Equality is attained at the point where supply
equals demand.

 When demand is higher than supply, prices will go
up to show that there is scarcity and when supply
is high, prices will go down showing that there is a
surplus.
 The law of demand leads to the introduction of the
relationship between price and demand of goods
and services.
 As the price of a commodity goes up, the demand
for the commodity decreases and as the price
goes down, and the demand for the same
commodity increases (Battalio 56).

Assessment of the Model
 The basic tenets of the consumer demand theory are
well founded and have been refined for many centuries.
 Demand and supply form the foundations of many
other sub-concepts which finally add to the nuance of
consumer behavior (Lancaster 76).
 Although several baskets do not rhyme with the ancient
model, there have been theories developed to act as
fillers for the gaps.
 Several kinds of goods including luxury goods, goods
with inelastic demand and waste externalities are
examples of goods that possess their own rules and
consistencies (Battalio 56).

 The most perfect example of the internal
inconsistency is the water versus diamond
inconsistency.
 However, there has been additional theory put
across that is used to give an explanation to the
paradox.
 Economic theory utility reveals itself in both
decision making of an individual and also the
macroeconomic policy (Battalio 45).

Applications
 The basic principle that motivates economists on
an individual level and in most cases the
consumer economists is the equality in the
marginal utility (Lancaster 48).
 A set of income constraint is given by the point
whereby individuals are perfectly efficient in their
expenditure so as to maximize their utility.
 The family financial planners educate the
consumers on how to develop a plan that
allocates their financial resources efficiently
(Battalio 34).

Conclusion
 Demand theory is one of the primary
hypotheses in microeconomics.
 Its objectives are to answer questions
concerning how badly people are affected
by limited resources and unlimited wants.
 Based on the utility of goods and services
by the consumers, firms may change
their supply so as to fit in the consumers;
budget.

Work Cited
 Battalio, Raymond C. ""A test of
consumer demand theory using
observations of individual consumer
purchases."." Economic Inquiry 55.7
(2017): 178-197.
 Lancaster, Kelvin J. ""A new approach to
consumer theory."." Journal of political
economy 23.4 (2014): 45-67.