ABSTRACT
The relationship between innovation and demand has been the subject of many publications but has generally been studied in a rather static and short-term framework. In highly interactive economic systems, the composition of which is continuously changed by innovation and by structural change, demand and innovation coevolve. Increases in productive efficiency continuously reduce costs and raise prices giving rise to a surplus which can be invested in the creation of new goods and services and in the formation of the disposable income required to purchase such goods and services. At the inter-sectoral level, the previous mechanism gives rise to growing output variety leading to a progressive differentiation of the economic system. At the intra-sectoral level, increasing output quality and diversification are parts of a coevolutionary process in which education, by improving the competencies and human capital of the labour force, contribute to generate higher quality and greater diversification of goods and services and justified the wages required to purchase them. This coevolutionary pattern was relatively long term, starting after the industrial revolution and accelerating during the 20th century, leading to an upward sloping part of the demand curve between low and middle prices. Coevolution is a very important and general mechanism of economic development of which the coevolution of demand and innovation is just an example.
