When we dealt with the economic problem of scarcity, we indicated that an important question that needs to be answered relates to the issue of what good and services need to be produced in order to obtain allocative efficiency. In a market system, this question of what to produce is answered by the behaviour of households through their demand for goods and services.
In our circular flow model, it is in the goods market that households (consumers) buy their goods and services and the producers supply their goods and services. Two active participants in this market are households, as the demanders of goods and services, and firms, as the suppliers of goods and services. In this section of the learning unit, we will take a closer look at the demand and the variables that influence the demand for or goods and services by households.