In microeconomics, demand is understood to mean the amount of any kind of goods and services that an economic subject is willing and able to acquire at a certain price in exchange for money or other goods. In neoclassical theory , demand arises from maximizing the utility of households , which gives rise to the consumer goods demand curves, and maximizing the profits of companies , which gives rise to the factor demand curves.
Companies , private households as well as the state and its subdivisions come into question as inquiring economic subjects . From a microeconomic point of view, the demand for goods is determined by the prices of goods, the prices of all other goods in the shopping basket , the income and the preferences of the buyer.
For individual goods / services, a distinction is made between the individual demand for a good by a single actor and the total demand , which is determined by the aggregation of the demand of all consumers of the corresponding good.
As a rule, it is assumed that - ceteris paribus - there is a systematic connection between prices, income and the amount of goods demanded. This relationship is shown in demand functions or demand curves. With a given income, these usually assign the quantity of goods requested to each price. Changes in income lead to shifts in the demand curves.
The interplay of supply and demand creates the market equilibrium .
Relationship between price and demand
A simple demand model assumes a simple, homogeneous economic good. The homogeneity of a good is the prerequisite for being able to speak of different quantities of a good and thus the demand of different actors can be summarized in terms of quantity. In the case of most goods, following the law of demand, it is assumed that when the price rises , demand decreases; the demand curves are therefore falling. The extent to which the price increase affects demand is measured with the help of the price elasticity of demand, which is consequently usually negative (special case e.g. Giffen paradox , see also demand behavior below). While a falling demand curve for the demand for production factors can be derived from the neoclassical theory of business, the falling demand for consumer goods does not follow from the neoclassical theory of households, since the existence of Giffen goods cannot be ruled out.
Under the usual assumptions of microeconomic theory, however, it can be shown that households reduce their demand for a product that increases in price if their real income is kept constant, i.e. H. when rising prices are offset by 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; H. if income rises, so does demand ( normal goods ).
Special cases: In the case of essential goods, however, it is less than 1 ( Engel's law ): If income increases by 10 percent, the demand for food, for example, increases by 7 percent. In the case of luxury goods , the income elasticity is correspondingly greater than 1. Negative income elasticities show inferior goods , for which demand falls for given prices and rising income.
Whether the demand curves assumed by the theory for certain consumer goods can also be observed empirically is controversial, since one can never observe the demand as such on the market, but only market results that result from the meeting of supply and demand (so-called identification problem ) .
In neoclassical price theory it is assumed that under competitive conditions ( partial analytical ) the current price of a good is determined by the intersection of the total supply and demand curves for this good. In general equilibrium analysis, the prices of all goods are determined by simultaneously equating total supply and total demand in all markets .
How far overall economic demand can be increased in the long term through wage increases, as is sometimes suggested by trade unions with reference to the purchasing power theory of wages, is questionable. Although higher wages have lead to more income in the short term, but they can also lead to business workers under the rationalization of capital (such as machinery replaced) and the productivity increase. This then reduces the number of income earners. In Germany, however, there is no empirical evidence that higher employee income leads to unemployment . It is more likely that the opposite can be proven, at least for the first few decades.
Demand behavior is the behavior of consumers depending on price (expenditure) or income (receipts). Depending on the good, a distinction is made between the income effect and the price effect . However, demand is still influenced by many social factors, such as the consumption of validity or follow-up effects .
In the economic analysis, it should be noted that with an increasing degree of aggregation (i.e. the more individual actors and individual goods are grouped together), the ceteris paribus clause becomes more and more problematic, as it can no longer be assumed that other circumstances (income, demand structure) remain unaffected by the changes in prices and demand quantities that can be represented in an aggregated demand function or curve. General equilibrium models circumvent this difficulty .
- Slutsky decomposition
- Price effect (alternative explanations for the demand behavior of households)
- General economic demand
- Offer (economics)