Demand is one of the main forms of expression of solvent demand. This is the price that the consumer is ready to pay for the goods he needs in a certain place at a certain time. Demand creates supply. It is these two components that are the basis for the functioning of any market, creating competition and setting prices. However, it should be understood that the mere desire to have a product that is not backed by cash is not in demand.
This economic category can be considered, guided by many factors. So, individual demand is a person’s personal need, reinforced by financial means. A solvent desire to purchase a given service or product in a certain period of time of the whole society as a whole represents aggregate demand.
This economic category is directly proportional to price. In ideal economic conditions, consumer demand is a category that will be the higher, the lower the price for the good we need. And, on the contrary, with a high level of the established price, demand for goods will fall. This relationship is the law of demand.
One of three reasons can serve as a motive for changing the level of demand:
1. price reduction leads to an increase in demand for goods;
2. if the product has a low cost, the purchasing power of the consumer increases;
3. if the market is filled with this product, then the usefulness of the product is reduced, and a person is ready to purchase it only at a low cost.
Moreover, the amount of goods that people want to buy in a given period of time at a given price represents the volume of demand.
Aggregate demand is influenced by factors that, by the nature of their occurrence, can be price and non-price. Price factors are those that directly affect the price. Non-price factors affect only demand. This is precisely the beginning from which they are repelled when analyzing the purchasing power of a person.
Factors Affecting Aggregate Demand
|
Factors |
What is included in their composition? |
|
Price factors |
Interest rate effect - when prices for any goods increase, the amount of loans increases and, accordingly, the interest rate level. The consequence is a decrease in demand. |
|
The effect of wealth - a rise in prices causes a decrease in the purchasing power of real financial assets (stocks, bonds, vouchers, etc.) As a result, there is a decrease in people's incomes and a decrease in their purchasing power. |
|
|
The effect of import purchases - an increase in the price of goods of national producers reduces the demand for them. Consumers strive to satisfy their needs by purchasing imported, cheaper counterparts. |
|
|
Non-price factors |
Change in consumer income - an increase in a person’s income allows him to spend more money on the purchase of goods and services, i.e. demand is growing. Conversely, the decline in income affects the demand. |
|
The change in investment costs - an increase in investment (investment demand) is directly dependent on a decrease in the interest rate, a reduction in taxes and deductions, the efficient use of production capacities, the introduction of know-how, etc. |
|
|
Change in general government spending - with an increase / decrease in government spending on the acquisition of goods, a process of increase / decrease in demand occurs. |
|
|
Changes in expenses attributable to net exports — this is influenced by the level of inflation within the country, foreign trade conditions and changes in the income of foreign consumers. |
