ABSTRACT
The consumer demand function for a single good explains how changes in consumers’ income and prices of all goods affect the quantity purchased of that good. Two of the main objectives of consumer demand theory are to (1) derive testable hypotheses about the demand functions, and (2) obtain income and price elasticities to measure consumer response to income and price changes. 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 one could derive demand equations. This chapter focusses on the application of the differential approach to derive demand equation.
