Households and Consumption

Abstract

Consumption of goods in households is the main purpose and the final result of a large part of economic activity. To demand for the consumables, however, households have to supply the service of factors of production to earn their incomes in the modern market economy. The role of the theory of the household is, therefore, to explain not only its demand for goods (the consumables) but also its supply of goods (the service of factors of production). But, fortunately, the households’ supply of the factors of production can be easily explained by an extension of the theory of their demand for goods. This is the reason why we can start with the theory of the behavior of a consumer who spends the given income to demand for the consumers’ goods. While the theory of the firm is developed as the theory of the constrained maximization, i.e., the maximization of profit subject to the production function, the theory of the consumers’ behavior also considers the constrained maximization, i.e., the maximization of utility subject to the budget constraint.