Intertemporal Two-stage Budgeting: Implications for Consumer Demands and Consumption

Consumer demands and consumption, though seemingly disjoint, are inextricably linked together via intertemporal two-stage budgeting, and cannot be separated. This paper elucidates this budgeting procedure with an illustration using the Linear Expenditure System, and evaluates the traditional analysis of consumer behavior that treats them as independent. We find that the dichotomous treatment of consumption expenditure and relative commodity prices in the traditional analysis creates a bias in the estimation of consumer demands and consumption. We argue that a proper understanding of consumer behavior entails an integration of consumer demands and consumption within a unifying framework, which can be achieved by utilizing the intertemporal two-stage budgeting procedure.