A New Approach to Consumer Theory by Kelvin J. Lancaster presents a revised framework for understanding consumer behavior, emphasizing the role of characteristics rather than goods themselves. Traditional consumer theory assumes that goods directly provide utility, but Lancaster argues that utility arises from the characteristics of goods. He introduces a model where consumption activities produce multiple characteristics, and preferences are based on these characteristics. This approach allows for a more nuanced understanding of consumer behavior, incorporating intrinsic properties of goods and their interactions. The paper critiques traditional consumer theory for its inability to account for intrinsic qualities of goods and its limited applicability to real-world scenarios such as new commodities and quality variations. Lancaster proposes a model where goods are inputs in consumption activities that produce characteristics, and utility is derived from these characteristics. This model allows for a more comprehensive analysis of consumer behavior, including the effects of price changes and the relationships between goods. The model is structured around two matrices, A and B, representing the relationship between goods and activities, and characteristics and activities, respectively. The analysis shows that the number of characteristics and goods can influence the nature of consumer choices and the efficiency of resource allocation. The paper also discusses the implications of this model for understanding substitution effects, complementarity, and the role of income in consumer behavior. Lancaster's approach highlights the importance of objective characteristics in consumer decision-making and provides a framework for analyzing consumer behavior in complex economies. The model allows for the examination of efficiency substitution effects, where changes in relative prices lead to changes in consumption patterns. The paper also addresses the distinction between objective and subjective choices, emphasizing the role of efficiency in consumer behavior. Overall, Lancaster's new approach to consumer theory offers a more comprehensive and flexible framework for understanding consumer behavior, incorporating the intrinsic properties of goods and their interactions in a more realistic manner. The model provides a foundation for analyzing consumer choices in complex economies and has implications for various aspects of economic theory and practice.A New Approach to Consumer Theory by Kelvin J. Lancaster presents a revised framework for understanding consumer behavior, emphasizing the role of characteristics rather than goods themselves. Traditional consumer theory assumes that goods directly provide utility, but Lancaster argues that utility arises from the characteristics of goods. He introduces a model where consumption activities produce multiple characteristics, and preferences are based on these characteristics. This approach allows for a more nuanced understanding of consumer behavior, incorporating intrinsic properties of goods and their interactions. The paper critiques traditional consumer theory for its inability to account for intrinsic qualities of goods and its limited applicability to real-world scenarios such as new commodities and quality variations. Lancaster proposes a model where goods are inputs in consumption activities that produce characteristics, and utility is derived from these characteristics. This model allows for a more comprehensive analysis of consumer behavior, including the effects of price changes and the relationships between goods. The model is structured around two matrices, A and B, representing the relationship between goods and activities, and characteristics and activities, respectively. The analysis shows that the number of characteristics and goods can influence the nature of consumer choices and the efficiency of resource allocation. The paper also discusses the implications of this model for understanding substitution effects, complementarity, and the role of income in consumer behavior. Lancaster's approach highlights the importance of objective characteristics in consumer decision-making and provides a framework for analyzing consumer behavior in complex economies. The model allows for the examination of efficiency substitution effects, where changes in relative prices lead to changes in consumption patterns. The paper also addresses the distinction between objective and subjective choices, emphasizing the role of efficiency in consumer behavior. Overall, Lancaster's new approach to consumer theory offers a more comprehensive and flexible framework for understanding consumer behavior, incorporating the intrinsic properties of goods and their interactions in a more realistic manner. The model provides a foundation for analyzing consumer choices in complex economies and has implications for various aspects of economic theory and practice.