Theorists are simplifiers. Their job is the elimination of complexities and detail so that we can understand what really matters. They often make assumption. They do this simplify the situation. For example, the elementary theory of aggregate demand assumes that prices and international trade are the "flesh". We can add them later to the "bones" of demand theory.
There are four "bones" in the theory. Two are in the goods market. They are consumption and investment. Together consumption and invesment are equal to total demand. Two "bones" are in the money market. (Demand manifests it self through money people need money to buy goods). There are two kinds of demand for money. They are transaction and speculation.
Economists use these four ideas to explain familiar questions. What are some of these questions ? Here is in example : what happens if goverments reduce income taxes ? Theory doesn't answer these questions, but it lets us discuss them in a common languange.
Let's start with good market. What determines consumption and investment ? Consumption and income are related. As income increases, so does consumption. Economists can define and measure consumption, but the meaning of "income" is less clear. people do not always spend according to their income in a particular. Income is a long term idea. It may extend over a person's lifetime. People change spending patterns id they think their income has changed in a permanent way.
Investment is a more dificult idea. Several different factors determine it. The most important is interest rates. If interest rate rise, companies may not hold as much inventory. They may put their money into a bank. In a bank, the money will earn interest income. The companies may decide to cancel projects that need capital.
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