1.

Demand Theory

The theory of demand is to explain the nature of the relationship between the quantity
demanded and price. The most important factors in determining demand include:

1. The price of the item itself.

2. Prices of other goods closely related to these goods.

3. Household income and average community income.

4. Community taste.

5. Forecasts about future conditions.

The demand for various commodities by individuals is usually referred to as the outcome of
the satisfaction maximization process. The interpretation of the relationship between price and
quantity demanded of the given good, given all other goods and services, it is this choice of
arrangement that will give the consumer the highest happiness. In the analysis of demand it is
considered that "the demand for an item is primarily strongly influenced by its price level".
Therefore, in demand theory, what is primarily analyzed is the relationship between the quantity
demanded of an item and the price of that item, assuming that other "factors" do not change or
ceteris paribus. If the price of a good increases, the quantity (amount) of goods demanded will
decrease or decrease, assuming ceteris paribus applies. The emergence of the law of demand,
namely the higher the price of an item, the less the quantity of goods demanded, and vice versa,
the lower the price of an item, the greater the quantity of goods demanded. An increase in
demand causes a price increase at the equilibrium price as well as the equilibrium quantity. A
decrease in demand will cause a decrease in both the equilibrium price and the equilibrium
quantity.

The quantity demanded and the price level have such a relationship because:
* Effect of income (Income effect)
If the price of an item rises, then with the same amount of income, people are forced to
buy less goods. Conversely, if the price of the good falls, with the same income people
can buy more of the good (and possibly other goods too), because their real income goes
up. For example: at a flour price of IDR 400-/kg, a family can buy 50 kg of flour per
month. But if the price of flour rises to Rp. 500.1 kg, with the same amount of money
they can only buy 40 kg of flour per month. The same holds true not only for individual
demand but also for market demand. If the price of an item rises (ceteris paribus), fewer
people can afford it with their income. On the other hand, if the price of a certain item
falls (ceteris paribus), more people who could not afford it before will now be able to
afford it, so that the number of buyers will increase. This is called the "income effect".
* Effect of substitution (Substitution effect)
If the price of an item rises, people will look for other goods that have the same function
but are cheaper. These substitutions are called substitutions. This symptom is called the
"substitution effect".
* Subjective reward (Marginal Utility)
Suppose a person has only one pair of earrings. Then he will value that pair of earrings
more highly than if he had ten pairs of earrings. If her earrings were damaged she would
be willing to pay for a new pair, even if they were expensive. On the other hand, if a
person has ten pairs of earrings, he will not feel a great loss if he loses one pair, and he is
not so willing to spend money to buy more earrings.

B. Goods and Money Market Equilibrium

The goods market is a process of interaction that occurs between demand and
supply of a product or service. In a closed economic system, the main demand comes
from the household sector as a consumer or buyer and the government as a producer or
seller. The goods market is a market where supply and demand for goods or services
meet. Usually this goods market is called or better known as the real sector. The IS
curve is a curve that can show the point of equilibrium level in the goods market which
will always be based on the national income expenditure approach (ependatur apporoah)
only that differs from investment.
In an Islamic (non-interest) economy, the demand for and supply of capital is
positively influenced by the expected rate of profit. An increase in the expected rate of
profit due to, for example, a reduction in taxes will encourage companies to increase their
purchases of capital goods. The company will seek capital to finance its investment. On
the side of capital owners, an increase in the expected rate of profit will encourage them
 to allocate more of their savings for investment even though the profit sharing ratio has
not changed. If the expected rate of profit on investment increases, supply and demand
will increase simultaneously at a fixed profit-sharing ratio. Although both are positive,
the elasticity of supply of capital is less than the elasticity of demand for capital because
the expected rate of profit has only a small effect on saving.
The money market, also known as the money market, is an abstract meeting place
where short-term fund owners can offer it to potential users who need it either directly or
through intermediaries. According to the theory put forward by Kaynes which is a
development of classical theory, states that the demand for money is based on the
motives of people who hold money. The classical theory states that money holders are
something that is owned by the community (Money is Public Goods). So for anyone who
hoards money or is left unproductive, that means they are reducing the amount of
currency in circulation which can make economic activity stall.

Bibliography

Ayu Rai, Introduction to Microeconomic Theory, Narotama University, 2011.

Tati Suhartati Joesron, M. Fathorrazi, Microeconomic Theory, Graha Ilmu, Yogyakarta 2012.