In
economicsEconomics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, demand management is the art or science of controlling economic
demand-Economics:*Demand ,the desire to own something and the ability to pay for it*Demand curve,a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
to avoid a
recessionIn economics, a recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way...
. In natural resources management and environmental policy more generally, it refers to policies to control consumer demand for environmentally sensitive or harmful goods such as water and energy. Within manufacturing firms the term is used to describe the activities of demand forecasting, planning and order fulfillment.
In
economicsEconomics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
the term is also used to refer to management of the distribution of, and access to goods and services on the basis of needs.
In
economicsEconomics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, demand management is the art or science of controlling economic
demand-Economics:*Demand ,the desire to own something and the ability to pay for it*Demand curve,a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
to avoid a
recessionIn economics, a recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way...
. In natural resources management and environmental policy more generally, it refers to policies to control consumer demand for environmentally sensitive or harmful goods such as water and energy. Within manufacturing firms the term is used to describe the activities of demand forecasting, planning and order fulfillment.
In
economicsEconomics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
the term is also used to refer to management of the distribution of, and access to goods and services on the basis of needs. An example is
social securitySocial security is primarily a social insurance program providing social protection, or protection against socially recognized conditions, including poverty, old age, disability, unemployment and others. Social security may refer to:...
and welfare services. Rather than increasing budgets for these things, governments may develop policies that allocate existing resources according a hierarchy of neediness.
It is inspired by Keynesian
macroeconomicsMacroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole. Along with microeconomics, macroeconomics is one of the two most general fields in economics. It is the study of the behavior and decision-making of entire...
, though today elements of it are part of the economic mainstream.
The underlying idea is for the government to use tools like
interest rateAn interest rate is the price a borrower pays for the use of money they do not own, for instance a small company might borrow from a bank to kick start their business, and the return a lender receives for deferring the use of funds, by lending it to the borrower...
s, taxation, and public expenditure to change key economic decisions like
consumptionConsumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally consumption is defined by opposition to production. But the precise definition can vary because different schools of economists define production quite differently...
,
investmentInvestment or investing is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. Investing is the active redirection of resources: from being consumed today, to creating benefits in the future; the use of assets to...
, the
balance of tradeThe balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports...
, and
public sector borrowingA budget deficit occurs when an entity spends more money than it takes in. The opposite of a budget deficit is a budget surplus. Debt is essentially an accumulated flow of deficits. In other words, a deficit is a flow, and debt is a stock....
resulting in an 'evening out' of the
business cycleThe term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
.
Demand management was widely adopted in the 1950s to 1970s, and was for a time successful. However, it is widely regarded as a force behind the
stagflationStagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a significant period of time. The portmanteau stagflation is generally attributed to British politician Iain Macleod, who coined the term in a speech to Parliament in 1965...
of the 1970s, though the
supply shockA supply shock is an event that suddenly changes the price of a commodity or service. It may be caused by a sudden increase or decrease in the supply of a particular good. This sudden change affects the equilibrium price....
caused by the
1973 oil crisisThe 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo" in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war; it lasted until March 1974...
could have also caused that.
Theoretical criticisms of demand management are that it relies on a long-run
Phillips CurveIn economics, the Phillips curve is a historical inverse relation between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of increase in nominal wages in the economy....
for which there is no evidence, and that it produces
dynamic inconsistencyA policy is typically described as a deliberate plan of action to guide decisions and achieve rational outcome. However, the term may also be used to denote what is actually done, even though it is unplanned....
and can therefore be non-credible.
Today, most governments relatively limit interventions in demand management to tackling short-term crises, and rely on policies like
independent central bankA central bank, reserve bank, or monetary authority is a banking institution granted the exclusive privilege to a lend a government its currency...
s and
fiscal policy ruleThe Golden Rule is a guideline for the operation of fiscal policy. The Golden Rule states that over the economic cycle, the Government will borrow only to invest and not to fund current spending. In layman's terms this means that on average over the ups and downs of an economic cycle the government...
s to prevent long-run economic disruption.
In the environmental context demand management is increasingly taken seriously to reduce the economy's throughput of scarce resources for which market pricing does not reflect true costs. Examples include metering of municipal water, and carbon taxes on gasoline.
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