Demand (economics)

Under demand is understood in microeconomics, the amount of any asset that economic actors are willing at a certain price in exchange for cash or other goods and able to purchase. In the neoclassical theory, there is the demand from the maximization of the utility of households, resulting in the consumer demand curves, and maximizing the profits of the company, from which arise the factor demand curves.

Determinants

The demand for goods is considered microeconomic determined by goods prices, the prices of all other goods in the basket, by the income and the preferences of the buyer.

For some goods, a distinction is individual demand of a good by a single actor of the total demand, which is determined by adding the demand of all buyers of the relevant goods.

In general, it is assumed that - there is a systematic relationship between prices, income and the demand quantity of goods - ceteris paribus. This relationship is illustrated in demand functions or demand curves. This order usually for a given income each price the quantity of goods demanded him to. Changes in income lead to shifts in the demand curves.

The interaction of supply and demand creates the market equilibrium.

Relationship between price and demand

In a simple model of demand is assumed that a simple homogeneous economic asset. The homogeneity of a property is the precondition that spoke of various amounts of a commodity and so the demand of different actors can be summarized in terms of quantity.

It is assumed in most of the goods that as the price reduces the demand; Thus, the demand curves are falling ( law of demand ). How much the price increase will feed through to demand, is measured with the price elasticity of demand, which consequently usually negative ( eg special case Giffen paradox, see also demand behavior below). While a falling course of the demand curves for the demand for factors of production from the neoclassical theory of the firm can be derived, followed by the falling demand for consumer goods not from the neoclassical theory of households, since the existence of Giffen goods can not be excluded.

Under the usual assumptions of microeconomic theory, however, it can be shown that households reduce their demand for an increase in price product if their real income is held constant, ie, if the rising prices offset by a higher income.

Relationship between income and demand

The relationship between demand and income is described by the income elasticity of demand. This is usually positive, that is, in income increases so does the demand for ( normal goods ).

Special cases: but the case of essential goods is less than 1 ( angel 's law ): If the income by 10 percent, increasing, for example, the demand for food by 7 percent. For luxury goods, the income elasticity is correspondingly larger than 1 Negative income elasticities of inferior goods in which at given prices and income rises, demand falls.

Whether or not the imputed from theory demand curves for certain consumer goods and empirically observed, is controversial, since one can never observe the demand as such on the market, but only market outcomes arising from the meeting of supply and demand (so-called identification problem ).

In the neoclassical price theory it is assumed that under competitive conditions ( partialanalytisch ) the current price of a good is determined by the intersection of aggregate supply and aggregate demand curve for this good. In the general equilibrium analysis, the prices of all goods are determined by the simultaneous identification of the total supply and total demand in all markets.

How far will the aggregate demand can be increased by long-term wage increases, as is sometimes made of unions with respect to the purchasing power theory of wages is questionable. Although higher salaries, have lead to more income in the short term, but they can also cause that companies are replacing labor by capital and increase productivity. This increases the number of income earners then returns. In the Federal Republic, however, can not empirically prove that higher labor income lead to unemployment. Rather, it can be shown, at least for the first decades of the opposite.

Demand behavior

The demand behavior is the behavior of consumers in response to price (expenses) and income ( revenue). Depending on the Good are categorized according to income effect and price effect. The demand is still affected by many social factors, such as conspicuous consumption or follower effects.

In the economic analysis is to be noted that ( be summarized that the more individual actors and individual goods) with increasing degree of aggregation, the ceteris paribus clause is always problematic, because just can not be assumed that other circumstances (income, demand structure ) remain unaffected by the represented in an aggregate demand function or curve changes in prices and demand quantities. This difficulty bypass models of general equilibrium.