A New Perspective
INTRODUCTION Consumer demand plays both an important normative and positive role in policymaking. As pointed out in Chapters 2 and 4, it is important in determining the welfare gains from economic activity (for example, for a Paretian optimum, there should be an optimal conformance between what consumers want and the composition of production) and, indeed, economists since Adam Smith have tended to stress the point that consumption is the end-purpose of all production. Economic systems are often judged by how well they meet the demands of consumers. But demand relationships are important positive components of many policy decisions. If a tax or import tariﬀ, for instance, is to be imposed on a particular commodity the government will need to know the demand function for that commodity (and the supply function) if it wishes to predict the eﬀect of the tax on the quantity consumed of the commodity and aims to estimate its tax revenue. A large ﬁrm which hopes to inﬂuence the sales of its products needs to be familiar with the factors determining this demand. A government which engages in ‘international resource diplomacy’ or adopts policies for the conservation of resources needs to take account of demand relationships. Both positive and normative aspects of demand theory are considered in this chapter. The main positive areas covered are the testing and predictive accuracy of demand theories and elasticities of demand with policy applications. The normative parts of the chapter deal with consumer welfare and sovereignty in terms of...
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