The theory of demand is also useful in some practical applications of economics known as cost-benefit analysis. In the theory of demand, we are asking the question, "What determines how much people are willing to pay for a good or service?" In answering that question, we also learn how to measure the benefits consumers get from what they consume. Benefits to consumers are important for cost-benefit analysis -- after all, the purpose of production is to provide benefits to consumers, and everything else in cost-benefit analysis (and in economics) starts with that!
The terminology and approach we will use are based on practical cost-benefit analysis. In the long "rational dialog" of demand theory, economists have developed two other approaches, "utility theory" and "preference theory," each with its own terminology, logic, and diagrams. All three approaches come to the same practical conclusions. The other two approaches are a bit more complex and difficult. For that reason, we will skip over them in this chapter. These other approaches, "utility theory" and "preference theory" will be explained in the next chapter. They play important roles in more advanced economics and the student who expects to go on in the study of economics should understand them. They also provide insights that are important in themselves, on issues such as inflation, equity, and managing risk. However, the student who wants only an overview of modern economics can skip the next chapter without running into any problems with the chapters to follow.
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