Household production function

Consumers often gain utility not directly from the goods that they purchase, but instead they transform the goods by a household production function into something that they value. The idea was originally proposed by Gary Becker and Kelvin Lancaster in the mid 1960s.

Examples

A simple example of this is baking a cake. The consumer purchases flour, eggs, and sugar, and then uses some time and their labor to produce a cake. The consumer did not really want the flour or sugar, but they purchased them so that they could produce the cake that they actually wanted.

Formal models