ABSTRACT
This chapter builds the foundations of demand theory by modeling how individuals make choices under constraints. We begin with preferences—assumed to be complete, transitive, and non-satiated—and introduce tools such as indifference curves, utility functions, and the marginal rate of substitution. We then incorporate budget constraints and solve for optimal consumption using utility maximization subject to income and prices. Applications include demand responses to price changes, international consumption patterns, and consumer heterogeneity. We extend the model to include opportunity cost, market prices, and real-world observations. The chapter also discusses critiques and extensions, including behavioral economics, social preferences, bounded rationality, lack of self-control, and decision-making biases. Classic experiments such as the ultimatum game and endowment effect illustrate deviations from the rational model. This comprehensive analysis links theory to observable behavior and policy relevance.
