A New System of Consumer Demand Equations (NIRSA) Working Paper Series. No. 4

This paper commences from a new indirect utility function and derives the corresponding system of equations, relating commodity demands to prices and income, that satisfies the constraints imposed by utility maximisation (aggregation, homogeneity, Slutsky symmetry and negativity). As the famous linear expenditure system (LES) is a special case of this new system, it is named the generalised Stone-Geary system (GSGS) and it incorporates a generalisation of the ‘subsistance’ income concept to one of ‘committed’ income. However, the GSGS is not subject to the well known limitations of the LES and it can model a reasonably representative range of consumer behaviour. It is also relatively parsimonious in parameters involving just 3n – 1, where n is the number of commodities. The new system has greater ranges of theoretical validity than various systems derived from ‘flexible’ functional forms. As with the LES, simple conditions on the parameters guarantee the validity of the system for all variable values except, perhaps, at low incomes