Demand Theory Under Review

Abstract

The conventional (i.e., neoclassical) theory of consumer choice is one of the great prides of economics, for, among other things, it provides a rigorous and elegant mathematical underpinning to the common-sense notion of the law of demand, that there is an inverse relationship between the price of a good and the amount of the good that a consumer is willing to buy. Macroeconomic theories over the years come and go, and to a lesser extent, the same is true of theories of production, but not the theory of consumer choice. For, although there periodically have been questions concerning the assumptions that underlie it, the theory has essentially retained its present form since the 1930s. It is, in short, one of the great invariants (along with the theory of least-squares estimation) in the core education of an economist. In the circumstances, accordingly, it might pretty much seem a waste of readers’ time to begin a demand study with a review of conventional theory, for one could easily begin, as is so often the case in demand studies: “Economic theory teaches us that quantity demanded is a function of price and income, that (in normal circumstances) demand functions slope downward with price and shift outward with income, and so on and so forth.” However, while the neoclassical theory (whether directly or in its equivalent alternative form in terms of revealed preference) will be a guiding framework within which the analyses of this book proceed, there will be a number of points at which results (and other considerations) emerge that tempt explanation or interpretation that go beyond that offered by this theory. For this reason, a brief review of conventional theory is in order.