Theory of Consumer Demand

Imagine you have a limited budget but plenty of things to buy. How do you decide what’s worth spending on? The Theory of Consumer Demand explains how people make these choices to get the most happiness, or utility, from the money they have.

It shows why the first slice of pizza feels amazing (total utility) but the joy reduces with each extra slice (diminishing marginal utility). It also explains how people rank their preferences (ordinal approach) or assign numbers to their happiness (cardinal approach) to guide their decisions.

Using indifference curves, the theory illustrates how people balance between goods, like choosing the right mix of coffee and donuts to stay equally happy. The goal is to reach consumer equilibrium, where spending perfectly matches satisfaction.

The theory also highlights consumer surplus—the extra happiness you get when you pay less than you’re willing to for something. Finally, the law of demand connects these ideas, showing why we buy more when prices drop.