Consumers and the Exchange Economy

Abstract

This chapter is a standard chapter on mainstream consumer theory and demand theory, with the addition of an introduction to the general equilibrium of pure exchange which allows illustrating the importance of continuity of consumer demand functions for the existence of general equilibrium. It notices the different interpretation of consumption demand depending on whether one is determining a long-period or a short-period or an intertemporal equilibrium. It covers the standard notions of consumer theory, including indirect utility, expenditure function, elasticity of substitution, CES utility functions, Roy’s Identity, Shephard’s Lemma, Slutsky equation, substitution and income effects, saving decision, duality, Hicksian aggregability of goods, equivalent variation, compensating variation, consumer surplus, revealed preference. The Kuhn-Tucker theorem is introduced to study utility maximization. On labour supply the chapter argues that the standard upward-sloping shape is unrealistic, and proposes a more realistic shape with a discontinuity at the subsistence level. The Gorman consumer aggregability conditions are explained but the conditions for the existence of a general-equilibrium representatitve consumer are shown to be different from the Gorman conditions. The weak axiom of revealed preference is shown not to extend to market demand functions if there isn’t a representative consumer.