Aggregate Demand of Market (B))
What is aggregate demand? What are the exceptions for general law of aggregate demand?
Posted: Sep 2009
Aggregate Demand is quantified expression of demand for a certain product or service within the market. Aggregate demand is total quantity of products that customers are willing to buy, according to all alternative prices.
The basic law of demand says: When the price of the product is increasing, the demand for the product is decreasing, and vice versa. The precondition for the basic law of demand is that other factors are constant.
This example shows the application of the basic law of demand. The higher price is decreasing the demand, while lower price is increasing the demand. The demand of every individual customer is varying. The aggregate demand curve is the expressing the demand of the whole market, under the given range of prices.
The aggregate demand law has some exceptions:
Veblen Effect - Increase of the price of certain luxury products may lead to increase of demand. Veblen Effect explains the desire of certain customers, that are willing to buy more expensive product, because of prestige and differentiation from the group.
Giffen Paradox - In case of price increase of inferior good, commonly used by low budget customers, the demand is increasing too. According the Giffen paradox, lower income customers will buy more bread in case of price increase, while they will reduce purchasing of other products.
The increase or decrease of income can also make a shift of aggregate demand of the market.
The customers that earns more are willing to pay more for the good, while customers with decreased income are reluctant regarding spending.
Aggregate Supply of Products
Market Balance: Demand and Supply Equilibrium
Case Study: Shift of Supply and Demand