Home EconomicsEconomic Theory Approaches to Theory of Demand

Approaches to Theory of Demand

By: EconomyWatch Date: 14 October 2010

About The Author

The core Content Team our economy, industry, investing and personal finance reference articles.

The approaches to the Theory of Demand are diverse in nature, facilitating a better understanding of the concept of supply and demand on the part of the readers. In fact, different approaches to the Theory of Demand attempt to explain the topic from various aspects and angles, by making an in-depth study on the subject. The Neo-classicists try to explain the Theory of Demand from their own perspective. The Neo-classical approach concentrates on the determination of yields , prices as well as the market distribution of incomes through the methods of supply and demand. These factors are judged on the basis of a theoretical escalation of income-constrained utility by the people, and on the cost-constrained profits of the companies having information and reasons of production on hand. In fact, the traditional economic theories are more neo-classical in their hypotheses on macro-economic levels.

The Theory of Demand can also be explained through the dynamic non-equilibrium approach. Developed from the economic concepts of Kalecki and Keynes, the dynamic non-equilibrium approach to the Demand Theory is explained in terms of static equilibrium. In fact, dynamic non-equilibrium approach is defined in terms of a given production level which matches with the equilibrium point existing between collective supply and demand.

A third method of approaching the Theory of Demand is the compensated demand function. This approach discards the utility function, but believes in the presence of certain hypothetical functional propositions which describe its logical nature. In the light of these properties, the utility functions can be analyzed as compensated demand functions, opening a new horizon for studying the Demand Theory.

The theory of effective demand can also be explained by the Keynesian theories of demand. The most important constituents of effective demand, according to Keynes is government expenditure and investments. Surplus production is mainly generated by the private sector of the economy and in this aspect government expenditure acts as a complementary force.