Consumer Demand Theory

Consumer Demand Theory is the study of how individuals, households and firms make decisions about how much of a given product or service to purchase. It looks at how factors such as income, prices, tastes and preferences, expectations, and the availability of substitutes affect the demand. It also studies how different markets interact and how prices are determined in those markets.

Income and Substitution Effects

When it comes to Consumer Demand Theory, two of the most important concepts to understand are income and substitution effects. The income effect looks at how an increase in income affects a consumer’s demand for a certain good or service. The substitution effect looks at how a change in the price of one good or service affects the demand for another good or service.

Price Elasticity of Demand

Price elasticity of demand is a measure of how sensitive the demand for a product or service is to a change in price. It is commonly expressed as a ratio of the percentage change in the quantity demanded to the percentage change in the price. If the elasticity of demand is greater than one, then the demand for the product is said to be elastic. If it is less than one, then the demand is said to be inelastic.

Cross Price Elasticity of Demand

Cross price elasticity of demand is a measure of how sensitive the demand for one good or service is to a change in the price of another good or service. It is calculated by taking the percentage change in the quantity demanded of one good or service, and dividing it by the percentage change in the price of another good or service.

Related Questions

  • What are the main components of Consumer Demand Theory?
  • How do income and substitution effects relate to Consumer Demand Theory?
  • What is price elasticity of demand?
  • How is the cross price elasticity of demand measured?
  • How are prices determined in a market?
  • What factors affect the demand for a product or service?
  • What is the difference between elastic and inelastic demand?
  • How do expectations and tastes affect demand?
  • What are the implications of Consumer Demand Theory?
  • What are the limitations of Consumer Demand Theory?