7 - Developments in demand theory

Summary

Introduction

This chapter, the last of the three devoted to demand analysis, examines areas of demand theory where advances have been made in recent years. Firstly, two reformulations of demand theory are presented. Both provide important insights into the analysis of some spheres of economic activity in which the traditional theory has had little to offer. These include advertising, product differentiation, and production and consumption activities for which there is no formal market. Elements of the ‘new’ theories have been adopted in the study of agricultural households in developing countries and so will be encountered again in Chapter 8. Secondly, the concept of duality can be applied to demand theory in an analogous fashion to its application in supply analysis (Chapter 4). Again we will find that there may be analytical and empirical advantages from exploiting dual relationships.

‘New’ theories of demand

The ‘new’ theories of demand which we wish to introduce here were developed by Lancaster and Becker in the 1960s. They are ‘new’ in the sense that they are major reformulations of demand theory but some of the premises on which they are based have been suggested in much earlier works in the economics literature. As will become clear the two approaches do have some common features. We begin with Lancaster's model.

Lancaster's model of consumer demand

A number of topics cannot be analysed easily within the framework of traditional demand theory.